The student will learn how financial institutions evaluate individual loan risk in an aggregate loan portfolio. The purpose is to identify potential factors that impact the approval of corporate loan applications. The student will benefit by recognizing the impact of corporate financial information have on the ability to access capital through the banking system.
Applied Skills:
· Interpret the Linear Probability Model
· Apply Financial Ratios into the Linear Probability Model
· Recognize Firm Financial Statement Information
· Demonstrate the use of the Altman Z score
· Analyze Loan Default Rates
· Evaluate Corporate Loans using the Mortality Rate Approach
· Calculate estimated Net Income
· Evaluate approval decision based on estimated the RAROC
Knowledge:
1. The students will develop exposure to four different criteria used
to accepting/rejecting loan applications
2. The students will analyze financial information and learn to apply
the information to make financial decisions.
Task:
1. Question #1: Estimate the linear probability model with information provided in the problem
2. Questions #1: State whether the loan should be accepted or rejected and why.
3. Question #2: Estimate the Altman Z Score with information provided in the problem
4. Question #2: State whether the loan should be accepted or rejected and why.
5. Question #3: Estimate the cumulative default probability using mortality rate approach
6. Question #3: State whether the loan should be accepted or rejected and why.
7. Question #4: Estimate the RAROC with information provided in the problem
8. Question #4: State whether the loan should be accepted or rejected and why.
Each question has two tasks assigned. Students should estimate the information given in the problem with the assigned analysis tool and accompany the estimate no more than one paragraph explaining why a loan should or should not be accepted.