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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.

Refer to Exhibit 9-2. Construct a decision tree to help the credit union decide whether or not to make the loan. Make sure to label all decision and chance nodes and include appropriate costs, payoffs and probabilities.

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(Top Tutor) Daniel C.
School: UCLA
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