The company you work for has developed a new credit scoring model to be used to make
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Question:
The company you work for has developed a new credit scoring model to be used to make acceptance and pricing decisions for all their loan applicants.
The credit score (S) is calculated as:
S = 5 - 5*(D/A) - 2*LTV + 0.5(Income/10,000) + 1.5*(if Revenue Insurance = yes)
where:
D/A = debt-to-asset ratio
LTV = loan-to-value (loan amount/value of project)
Revenue Insurance = 1 if the applicant has revenue insurance, 0 otherwise
You accept the loan if S > 5. If the loan is accepted, you offer the following interest rate (r):
r = Prime Rate + (7 - S)%.
The current Prime Rate = 6.5%.
The credit scoring model outlined above, would you accept the loan application, and if so at what interest rate?
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