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County Bank offers one-year loans with a stated rate of 9 percent




10. County Bank offers one-year loans with a stated rate of 9 percent but requires a;compensating balance of 10 percent. What is the true cost of this loan to the borrower? How;does the cost change if the compensating balance is 15 per-cent? If the compensating balance;is 20 percent? In each case, assume origination fees and the reserve requirement are zero.;13. Why could a lenders expected return be lower when the risk premium is increased on a;loan? In addition to the risk premium, how can a lender increase the expected return on a;wholesale loan? A retail loan?;14. What are covenants in a loan agreement? What are the objectives of covenants? How can;these covenants be negative? Positive?;16. Why is the degree of collateral as specified in the loan agreement of importance to a;lender? If the book value of the collateral is greater than or equal to the amount of the loan, is;the credit risk of a lender fully covered? Why or why not?;17. Why are FIs consistently interested in the expected level of economic activity in the markets;in which they operate? Why is monetary policy of the Federal Reserve System important to FIs?;21. Describe how a linear discriminant analysis model works. Identify and discuss the criticisms;which have been made regarding the use of this type of model to make credit risk evaluations.;22. Suppose that the financial ratios of a potential borrowing firm take the following values;Working capital/total assets ratio (X 1) = 0.75;Retained earnings/total assets ratio (X 2) = 0.10;Earnings before interest and taxes/total assets ratio (X 3) = 0.05;Market value of equity/book value of long-term debt ratio (X 4) = 0.10;Sales/total assets ratio (X 5) = 0.65;15. Suppose that an FI holds two loans with the following characteristics.;Loan;Xi;Expected;Annual Spread b/w Loan Rate and;Annual Fees;Loss to;And FIs Cost of Funds;FI Given Default;Default;1;4.0%;2;1.5;?;p(12)=- 0.10;?;4.0 %;1.50%;?%;2.5;1.15;?;The return on loan 1 is R 1 = 6.25%, the risk on loan 2 is Sigma 2 = 1.8233%, and the;return of the portfolio is R p = 4.555%. Calculate of the loss given default on;loans 1 and 2, the proportions of loans 1 and 2 in the portfolio, and the risk of;the portfolio, sigma p, using Moodys Analytics Portfolio Manager.


Paper#27167 | Written in 18-Jul-2015

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