Question: A mortgage lender attempted to increase its business by marketing its subprime mortgage. This mortgage is designed for people with a less-than-perfect credit rating, and

A mortgage lender attempted to increase its business by marketing its subprime mortgage. This mortgage is designed for people with a less-than-perfect credit rating, and the interest rate is higher to offset the extra risk. In the past year, 20% of these mortgages resulted in foreclosure as customers defaulted on their loans. A new screening system has been developed to determine whether to approve customers for the subprime loans. When the system is applied to a credit application, the system will classify the application as "Approve for loan" or "Reject for loan." When this new system was applied to recent customers who had defaulted on their loans, 90% of these customers were classified as "Reject." When this same system was applied to recent loan customers who had not defaulted on their loan payments, 70% of these customers were classified as "Approve for loan."
(a) If a customer did not default on a loan, what is the probability that the rating system would have classified the applicant in the reject category?
(b) If the rating system had classified the applicant in the reject category, what is the probability that the customer would not default on a loan?

Step by Step Solution

★★★★★

3.38 Rating (170 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

Let D Default on loan D No default ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

162-M-S-P (566).docx

120 KBs Word File

Students Have Also Explored These Related Statistics Questions!

An electrochemical cell is based on the following two half-reactions: Ox: Pb(s)Pb2+(aq,Pb(s)Pb2+(aq, 0.15 MM )+2e)+2e Red: MnO4(aq,MnO4(aq, 1.80 MM )+4H+(aq,)+4H+(aq, 1.9 MM )+3e)+3e MnO2(s)+2H2O(l)...

If interest is compounded continuously and the interest rate is tripled, what effect will this have on the time required for an investment to double?

The budget limit is $120,000, and the interest rate is 10% per year. All projects have a 10-year life. Use (a) The PI method (b) The IROR method to rank and select from the independent projects. (c)...

A mortgage lender attempted to increase its business by marketing its subprime mortgage. This mort - gage is designed for people with a less - than - perfect credit rating, and the interest rate is...

Qus13 Please provide a conclusion for the following: Introduction Great recession is the most severe and long-lasting economic crisis since the Great Depression. The crisis was not confined to...

BARKER S.A. has issued 400.000 common shares and is going to issue an additional 100.000 shares via subscription rights. Each shareholder will receive a subscription right per share. Mr. A has 40.000...

Describe the primary differences between the conceptual and logical data models.

Part 1 ; The these inputs for Problems 1 through 7 : You manuge a riaky pertifolls with expected rabe of refurn of 1 8 % and standard deviation of 2 5 % . The T - hit rate la 8 % money market flad....

9. Survey students What problems do you see with asking the following question of students? Are you the first member of your family to seek higher education?

=7-24 The stock brokerage firm of Blank, Leibowitz, and Weinberger has analyzed and recommended two stocks to an investors club of college professors. The professors were interested in factors such...

=7-23 Consider this LP formulation: Minimize cost subject to = + + + + $ , X Y X Y X Y X Y Y X 2 3 90 8 2 160 3 2 120 70 Y 0 Graphically illustrate the feasible region and apply the isocost line...

=7-22 Solve the following LP problem using the corner point graphical method. At the optimal solution, calculate the slack for each constraint: Maximize profit subject to = + + + 4 4 3 5 150 2...

of "How far out (in the X-direction) from the edge of the table will the ball strike the floor?" Data: Height of table = 85 cm Velocity of the ball on the table = 1.25 m/s

Find the amount to which $400 will grow under each of these conditions: 6% compounded annually for 5 years. Do not round intermediate calculations. Round your answer to the nearest cent. $ 6%...

Question: Prompt: Submit a comprehensive risk analysis paper that identifies the cyberlaw foundations that affect Equifax. The framework for the assessment will include how the business model ensures...