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To Loan or Not to LoanStudent Coaching Notes

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Concepts Covered

Statistics

Macroeconomics

Ethics

Simple linear regression formula: y = a + bx

y = dependent variable = predicted valuex = independent variable = what you know

See “Doing a regression on Excel” in Materials/Case Material section of Bus 302 web site

Question 1a: Linear Regression

R squared = coefficient of determination= percent of total variation in y that can be

explained by x

Question 1a: Linear Regression

Question 1b: Finding Credit Score

Y = a + bx from Question 1a

Use algebra to solve for credit score.

Question 1d: Minimum Credit Score

This is a short answer question.

No algebra or formula needed.

What are trade-offs if you use a high standard for making a loan versus a low standard?

Are you the only lender in the market?

Question 2: Include in Your Paper

How does the Federal Reserve tighten monetary policy?

What is the effect of a tight monetary policy on interest rates, price level changes (inflation), and home price changes?

Question 2: More Regression

Same statistics information as Question 1a

What is predicted value? Y = ? What value do you know? X = ?

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Questions 1 & 2 :Regression Results

Be sure to show the value of and know the meaning of:

Coefficient of determination (R Square)

p-value

Regression coefficient

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Question 3: Higher Subprime Interest Vs. Higher Default Costs?

Calculate average interest loss if loan becomes delinquent.

Use estimated numbers in case and Mary’s assumptions.

No need to use outside data

What is expected loss?

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Question 4: Should Mary Sell Some Subprime Loans?

What is the secondary market? How does selling loans on the secondary

market affect bank’s risk exposure? Look at the possible gains and losses to the

bank after December 2006 – look at possible macroeconomic factors.

Make your case on data prior to January 2007.

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Question 5: Ethical Dilemmas

Use the ethical approaches discussed previously in class.

Remember to indentify relevant stakeholders.