(f) Under Risk-premium Analysis, if the borrower increases its loan amount from 10 million to 100...

(f) Under Risk-premium Analysis, if the borrower increases its loan amount from 10 million to 100 million, the lending outcome is not impacted. Is this statement true or false? If this statement is true, please explain why banks are still using this method. If this statement is false, explain why.

Solutions

Expert Solution

This statement is FALSE because under risk premium method when there would be an increase of loan amount from 10 million to 100 millions, it would mean that the risk related with such loan is increasing in nature at the perspective of the lender, because the buyer is more likely to default on such higher amount and the risk premium would be higher because there is higher exposure of these commercial bank onto these loans so it can be said that when there is an increase of loan from 10 million to 100 Millions on the upside, it would be an increase in the overall risk premium of the commercial bank and it should always be discounted by these banks and this Bank would be considering it, as the lending outcome is also impacted.

Banks are still using this method because this will be helping in determining the overall risk associated with specific loan and it will also help them in proactive adjustment of risk related to these loans.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A sovereign borrower is considering a $100 million loan for a 44-year maturity. It will be...

A sovereign borrower is considering a $100 million loan for a 44-year maturity. It will be an amortizing loan, meaning that the interest and principal payments will total, annually, to a constant amount over the maturity of the loan. There is, however, a debate over the appropriate interest rate. The borrower believes the appropriate rate for its current credit standing in the market today is 9%, but a number of international banks with which it is negotiating are arguing that...

A borrower borrows on a five year loan $5,000 from a bank at 10% and will...

A borrower borrows on a five year loan $5,000 from a bank at 10% and will pay back the loan in ten equal $ payments (semi-annually) at the end of each time period. How much is each equal payment, how much principal and interest is paid back, and how much interest is paid back?

Dynamic Corporation has an existing loan in the amount of 10 million with an annual interest rate of

Dynamic Corporation has an existing loan in the amount of 10 million with an annual interest rate of 5.5%. The company provides an internal company-prepared financial statement to the bank under the loan agreement. Two competing banks have offered to replace Corporation's existing loan agreement with a new one. Money Tree Bank has offered to loan Dynamic $10 million at a rate of 4.4% but requires Dynamic to provide financial statements that have been reviewed by a CPA firm. Credit...

Bob writes a two-year 100-strike European put with a premium of $10. The continuously compounded risk-free...

Bob writes a two-year 100-strike European put with a premium of $10. The continuously compounded risk-free interest rate is 4%. Calculate the difference between Bob’s maximum profit and his minimum profit

The Bradford Company issued 10% bonds, dated January 1, with a face amount of $100 million...

The Bradford Company issued 10% bonds, dated January 1, with a face amount of $100 million on January 1, 2021. The bonds mature on December 31, 2030 (10 years). For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Required: 1. Determine the price of the bonds at January...

A $100 million interest rate swap has a remaining life of 10 months. under the terms...

A $100 million interest rate swap has a remaining life of 10 months. under the terms of the swap, 6-month LIBOR is exchanged for 7% per annum (compounded semiannually). the average of the bid-offer rate being exchanged for 6-month LIBOR in swaps of all maturities is currently 5% per annum with continuous compounding. the 6-month LIBOR rate was 4.6% per annum 2 months ago. What is the current value of the swap to the party paying floating?

In 10 years, a firm will have annual cash flows of $100 million. Thereafter, its cash...

In 10 years, a firm will have annual cash flows of $100 million. Thereafter, its cash flows will grow at the inflation rate of 3%. If the applicable interest rate is 8%, estimate its value if you will sell the firm in 10 years? What would this be worth today? Show your work.

How can the analysis of risk be integrated into the valuation of common stock? What should happen to the value of common stock if its beta increases?

ast year the Diamond Manufacturing Company purchased over $10 million worth of office equipment under its...

ast year the Diamond Manufacturing Company purchased over $10 million worth of office equipment under its “special ordering” system, with individual orders ranging from $5,000 to $30,000. Special orders are for low-volume items that have been included in a department manager’s budget. The budget, which limits the types and dollar amounts of office equipment a department head can requisition, is approved at the beginning of the year by the board of directors. The special ordering system functions as follows. Purchasing:...

E-Z Loan, Co. makes loans to high-risk borrowers. E-Z borrows from its bank and then lends...

E-Z Loan, Co. makes loans to high-risk borrowers. E-Z borrows from its bank and then lends money to people with bad credit. The bank requires E-Z Loan to submit quarterly financial statements in order to keep its line of credit. E-Z’s main asset is Accounts Receivable. Therefore, Bad Debts Expense and Allowance for Bad Debts are important accounts. Slade McMurphy, the owner of E-Z Loan, wants net income to increase in a smooth pattern rather than increase in some periods...

Subjects