decision model for loan

Sigchi4life
Category:
Business & Finance
Price: $15 USD

Question description

A customer has approached a local credit union for a $20,000 1-year loan at a 10% interest rate. If the credit union does not approve the loan application, the $20,000 will be invested in bonds that earn a 6% annual return. Without additional information, the credit union believes that there is a 5% chance that this customer will default on the loan, assuming that the loan is approved. If the customer defaults on the loan, the credit union will lose the $20,000. At a cost of $150, the bank can thoroughly investigate the customer’s credit record and supply a favorable or unfavorable recommendation. Past experience indicates that in cases where the customer did not default on the on the approved loan, the probability of receiving a favorable recommendation on the basis of the credit investigation was 80%. Furthermore, in cases where the customer defaulted on the approved loan, the probability of receiving a favorable recommendation on the basis of the credit investigation was 25%.


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