(a) ABC Bank offers a one-year loan with an 8% interest rate, charges a 0.30% loan...

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(a) ABC Bank offers a one-year loan with an 8% interest rate, charges a 0.30% loan origination fee, imposes a 5% compensating balance requirement, and must hold a 6% reserve requirement at the Central Bank. The loans are repaid at maturity. What is the bank's gross return on this loan? (5 marks) (b) If the probability of default on the above loan is 10% and the bank expects to recover 65% of the principal and interest due in a default, what is the expected gross return on the loan? (5 marks) (c) A bank is assessing the creditworthiness of a borrower with the following financial characteristics: Working capital/total assets ratio (X1)=0.80 Retained earnings/total assets ratio (X2) = 0.09 Earnings before interest and taxes/total assets ratio (X3)=0.04 Market value of equity/book value of total liabilities ratio (X4) = 0.15 Sales/total assets ratio (Xs) = 0.60 Using Altman's Z-model (Z=1.2X1+ 1.4X2 + 3.3X3 +0.6X4 + 1.0X5) - discuss the creditworthiness of this borrower. (6 marks) (d) Outline some of the disadvantages of linear discriminant models as a method of making credit decisions. (8 marks) (e) The rate on 1-year Treasury strips is 5% and the rate on 1 year, zero coupon, BBB rated bonds is 7.25%. Assuming a zero recovery rate on defaults, what is the implied probability of default for the BBB rated bonds? (5 marks) (f) Briefly discuss how and why the credit decision process is different at the retail and wholesale levels. (6 marks) (Total 35 Marks) (a) ABC Bank offers a one-year loan with an 8% interest rate, charges a 0.30% loan origination fee, imposes a 5% compensating balance requirement, and must hold a 6% reserve requirement at the Central Bank. The loans are repaid at maturity. What is the bank's gross return on this loan? (5 marks) (b) If the probability of default on the above loan is 10% and the bank expects to recover 65% of the principal and interest due in a default, what is the expected gross return on the loan? (5 marks) (c) A bank is assessing the creditworthiness of a borrower with the following financial characteristics: Working capital/total assets ratio (X1)=0.80 Retained earnings/total assets ratio (X2) = 0.09 Earnings before interest and taxes/total assets ratio (X3)=0.04 Market value of equity/book value of total liabilities ratio (X4) = 0.15 Sales/total assets ratio (Xs) = 0.60 Using Altman's Z-model (Z=1.2X1+ 1.4X2 + 3.3X3 +0.6X4 + 1.0X5) - discuss the creditworthiness of this borrower. (6 marks) (d) Outline some of the disadvantages of linear discriminant models as a method of making credit decisions. (8 marks) (e) The rate on 1-year Treasury strips is 5% and the rate on 1 year, zero coupon, BBB rated bonds is 7.25%. Assuming a zero recovery rate on defaults, what is the implied probability of default for the BBB rated bonds? (5 marks) (f) Briefly discuss how and why the credit decision process is different at the retail and wholesale levels. (6 marks) (Total 35 Marks)