How does adverse selection hur

How does adverse selection hurt banks?

Why wouldn’t banks just charge higher interest rates forloans?

How does moral hazard hurt banks?

What are some of the factors used in creditscoring?

Payment history, amounts owed, length of credit history, creditmix in use, new credit.

What does it mean to “perfect” collateral?

Why did credit analysis fail to prevent the subprimemortgage crisis?

What are the Five C’s of Credit?

Explain some of the questions that financialinstitutions try to answer to assess the Five C’s for a businessloan application.

What are some of the problems with using ratio analysisto assess creditworthiness?

Explain each of these strategies for managing creditrisk and give an example of each

Loan covenants

Conditions precedent

Monitoring

What are some of the potential problems of using creditscoring models such as Altman’s Z Score to assesscreditworthiness?

Answer:

Ans a)  That is what happen when banks try to makemore profit by charging higher interest rate where borrower willmore likely to not pay its debt and create a adverse selctionproblem to banks. This is called adverse selection: the most eagerborrowers will be the least desirable, making lenders less willingto lend.

Ans b) Bank can’t charge higher interest rate bacause it willcreate more problem to borrower because business has to get morerevenue to fulfil its debt obligations which can’t be possible ifinterest rate will be very high.

Ans c) The other problem that financial systems encounter inprocessing information is moral hazard. Once a borrower has hisloan, he may try to cheat. In investing the money, the most he canlose is the amount of the loan. But he may calculate that thegreater the risk he takes with the money, the higher his chances ofdoing very well. Because his losses are capped, he is encouraged totake a bigger risk with his investment than he otherwise would.

Ans e) Collateral is used for the hedging it is mainly used bythe lender to minimize its risk exposure. There is very difficultto find perfect collateral. Perfect collateral is the asset which’svalue is direcltly realted to the loan value. In that way ifborrower default on loan then lender can get the whole money byusing perfect collateral.

Ans f) Most of the credit rating agencies were not able tounderstand the financial insturments formed using securitizationand unable to guage the risk associated with it that’s why itcreated the issue during credit analysis. There is also a conflictof interest happens during credit analysis which leads to very laxcredit analysis of these financial products. Due to these reasonscredit analysis perormed by credit rating agencies failed toprevent the subprime mortgage crisis.

Ans g) Five C’s of credit:

1. Character: Credit history

2. Capacity : Borrower’s ability ot repay its loan

3. Capital

4. Collateral: borrower secure loans

5. Conditions: such as interest rate, amount of principal


 
"Our Prices Start at $11.99. As Our First Client, Use Coupon Code GET15 to claim 15% Discount This Month!!"
Calculate the price
Make an order in advance and get the best price
Pages (550 words)
$0.00
*Price with a welcome 15% discount applied.
Pro tip: If you want to save more money and pay the lowest price, you need to set a more extended deadline.
We know how difficult it is to be a student these days. That's why our prices are one of the most affordable on the market, and there are no hidden fees.

Instead, we offer bonuses, discounts, and free services to make your experience outstanding.
How it works
Receive a 100% original paper that will pass Turnitin from a top essay writing service
step 1
Upload your instructions
Fill out the order form and provide paper details. You can even attach screenshots or add additional instructions later. If something is not clear or missing, the writer will contact you for clarification.
Pro service tips
How to get the most out of your experience with brilliantassignmenthelp.com
One writer throughout the entire course
If you like the writer, you can hire them again. Just copy & paste their ID on the order form ("Preferred Writer's ID" field). This way, your vocabulary will be uniform, and the writer will be aware of your needs.
The same paper from different writers
You can order essay or any other work from two different writers to choose the best one or give another version to a friend. This can be done through the add-on "Same paper from another writer."
Copy of sources used by the writer
Our college essay writers work with ScienceDirect and other databases. They can send you articles or materials used in PDF or through screenshots. Just tick the "Copy of sources" field on the order form.
Testimonials
See why 20k+ students have chosen us as their sole writing assistance provider
Check out the latest reviews and opinions submitted by real customers worldwide and make an informed decision.
11,595
Customer reviews in total
96%
Current satisfaction rate
3 pages
Average paper length
37%
Customers referred by a friend
OUR GIFT TO YOU
15% OFF your first order
Use a coupon FIRST15 and enjoy expert help with any task at the most affordable price.
Claim my 15% OFF Order in Chat
Close

Sometimes it is hard to do all the work on your own

Let us help you get a good grade on your paper. Get professional help and free up your time for more important courses. Let us handle your;

  • Dissertations and Thesis
  • Essays
  • All Assignments

  • Research papers
  • Terms Papers
  • Online Classes