24 Jun Finance Work
Here are 2 questions, and each question has 2 or 3 parts that I need full and complete calculations and explanations. PLEASE READ them. This is Due Friday the 27th thank you for your help in advance. Directions and questions are also attached in word document
Question 20
suppose the estimated linear probability model used by an FI to predict business loan applicant default probabilities is PD = 0.03X1 + 0.02X2 − 0.05X3 + error, where X1 is the borrower’s debt/equity ratio, X2 is the volatility of borrower earnings, and X3 is the borrower’s profit ratio. For a particular loan applicant, X1 = 0.75, X2 = 0.25, and X3 = 0.10.
A. What is the projected probability of default for the borrower?
B. What is the projected probability of repayment if the debt/equity ratio is 2.5?
Question 32
The bond equivalent yields for U.S. Treasury and A-rated corporate bonds with maturities of 93 and 175 days are given below:
| 93 days | 175 Days | |||
| Treasury strip | 8.07% | 8.11% | ||
| A-rated corporate | 8.42 | 8.66 | ||
| Spread | 0.35 | 0.55 | ||
a. What are the implied forward rates for both an 82-day Treasury and an 82-day A-rated bond beginning in 93 days? Use daily compounding on a 365-day year basis.
b. What is the implied probability of default on A-rated bonds over the next 93 days? Over 175 days?
c. What is the implied default probability on an 82-day, A-rated bond to be issued in 93 days?
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