1 pointThe Probability of Default (PD) is a key component in credit risk analysis. Which of the following statements best defines the Probability of Default?a. It is a measure of the uncertainty in the financial markets.b. It represents the likelihood of a loan being approved by a lender.c. It quantifies the risk of a borrower defaulting on their credit obligations.d. It determines the maturity date of a financial instrument.29.63%

Assume that there are two factors influencing the past default behaviour of borrowers; these being the debt to equity ratio and the sales to assets ratio. Based on past default (repayment) experience, the linear probability model is estimated as Zi = 0.5(D/Ei) - 0.25 (S/Ai). Assume that a prospective borrower has a D/E ratio of 0.9 and a sales to assets ratio of 1.5. What is the borrower’s probability of default? (0.5 marks)

Credit or default risk is the risk that interest and principal payments due on the obligation will not be made as required.Select one:TrueFalse

A bank has made two loans, A & B, charging a base lending rate of 10 per cent. It expects a probability of default of 5 per cent for both loans. If the proportion of the principal and interest that is collectible on default is higher for loan A, which of the following statements is true: (0.5 marks)Question 6Answera.Loan A has a higher risk.b.Loan B has a higher risk.c.Loans A and B have the same level of risk.d.None of the above is correct.

What type of risk does a bank undertake when it fears a borrower might default on a loan?Liquidity RiskOperational RiskCredit RiskMarket Risk

Let’s say that you are the Business Analytics Head at a national bank. From the historical data, you have determined that there is a 0.33 probability that a customer would default on a particular loan. What is the probability that out of the next two customers who apply for the same loan, both would not default on the loan?0.110.890.450.29