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? 

Transcribed Image Text:

Applicant Name D/A Income Loan Amount Value of Project Revenue Insurance? LTV S Accept or reject loan? r Brutus Buckeye 0.5 80,000 90,000 120,000 Yes Applicant Name D/A Income Loan Amount Value of Project Revenue Insurance? LTV S Accept or reject loan? r Brutus Buckeye 0.5 80,000 90,000 120,000 Yes

Answer rating: 100% (QA)

We must compute the applicants credit score S based on the given data in order to dec... View the full answer