Exhibit 9-2 a Customer Has Approached a Local Credit Union for a for a $20,000

question 1

Essay

Exhibit 9-2
A customer has approached a local credit union for a $20,000 1-year loan at a 10% interest rate. If the credit union does not approve the loan application, the $20,000 will be invested in bonds that earn a 6% annual return. Without additional information, the credit union believes that there is a 5% chance that this customer will default on the loan, assuming that the loan is approved. If the customer defaults on the loan, the credit union will lose the $20,000.
-Refer to Exhibit 9-2.Suppose that an actual (not perfectly reliable)credit report has the following characteristics based on historical data; in cases where the customer did not default on the approved loan,the probability of receiving a favorable recommendation on the basis of the credit investigation was 80%,while in cases where the customer defaulted on the approved loan,the probability of receiving a favorable recommendation on the basis of the credit investigation was 25%.Given this information,what are the posterior probabilities that default will and will not occur,given the credit report

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Definitions:

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