BUS 308 Principles of Lending, Credit Risk Management and Modelling
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- Course Code: BUS 308
- Course Title: Credit and Lending Decisions
- Referencing Styles: APA
- Words: 9000+
- University: Singapore University of Social Sciences
- Country: SG
QUESTION 1(a) (continued)
(ii) How does the free-rider problem make adverse selection and moral hazard problems worse in financial markets? Did the free-rider problem contribute to/exacerbate the global financial crisis? Be specific.
CONBANK bank has the following market value balance sheet structure:
|Assets||Amount||Liabilities and Equity||Amount|
|Cash||$2,000||Certificate of Deposit||$20,000|
The bond has a 20-year maturity and fixed-coupon rate of 5 percent. The certificate of deposit has a one-year maturity and a 3 percent fixed rate of interest. SBSC bank expects no additional asset growth.
(i) If at the end of the year, one market interest rate decreased by 50 basis points, what will be the net interest income for the second year?
(ii) Calculate the market value of equity at the end of year one assuming that market interest rates decreased by 50 basis points.
Applicants for single period loans of $1,500,000 at the contracted interest rate of 3.0% per annum (p.a.) have been assessed to a range of default probabilities. The bank can finance these loans at a risk-free rate of 1.25% p.a. What is the cut-off default probability? What implication does this result have for the bank’s screening function?