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Calculate the prospective borrowers expected probabilities

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Reference no: EM132957885

Suppose there were two factors influencing the past default behavior of borrowers: the leverage or debt-assets ratio (D/A) and the profit margin ratio (PM).

Based on past default (repayment) experience, the linear probability model is estimated as:

PDi = + 0.105(D/Ai) - 0.35(PMi)

Problem 1: Prospective borrower A has a D/A = 0.65 and a PM = 5%, and prospective borrower B has a D/A = 0.45 and PM = 1%. Calculate the prospective borrowers' expected probabilities of default (PDi). Which borrower is the better loan candidate? Explain your answer.

Reference no: EM132957885

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