Tutorial 4 (answer)

Tutorial 4 Question 1 (Credit Evaluation: See how credit worthy are customers – Credit Scoring) Four main objectives are: a) Matching loan with consumers’ need (Most importantly: Must give customers what they want!) b) Ensure compliance with internal ( Talking about banks only) and external rules and regulations (By MAS) c) Maintain customers’ goodwill (E.g.: Teller finds out that applicant has missing details immediately.) d) Ensure that credit risk is acceptable Question 2 NOTE: Pricing is crucial and may affect credit losses a) • • • •

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Pricing below the market New market entrants or low cost producers Do not compromise on quality and offers inferior products Know own costs else profitability affected Attracts good customers who will not use the line? (Generally increase credit standards, only good customers who can pay can meet the criteria)) a) Pricing at the market Conventional and conservative approach Ensure product is comparable Any product enhancements?

a) Pricing above the market • Service or product must be superior • May attract desperate customers resulting in high credit losses (Have to compensate people who CANNOT pay) There is no best strategy! Some other approaches include: a) Risk adjusted / risk based pricing: • Higher fees and interest for risky customers a) Special introductory offer rates to attract new customers

b) Load additional fees e.g. late-payment, over-limit, cheques with insufficient funds Question 3 a) Loan amount = Pann(PVIFA 8%, 30) $95 000 = Pann (11.257) Pann = $8 439.19 Pmon = $703.27 b) PMT = PV*i___ 1-1/(1+i)n = 95 000 * (8%/12) 1-{1/[1+(8%/12)]30*12} = 633.33 0.908556627 = 697.0763456 I = annual interest rate N = number of years Question 4 a) P(principle) M(months) T(time/years) = $645 * 12 X 3 – 20 000 = $3200 b) CLUE: Use [Insert] [Function] [PMT] NOTE: PV has a negative value! As from a bank’s perspective, the money is given out first)