Which One of the Following Credit Decisions Appears Correct for a Customer

question 29

Multiple Choice

Which one of the following credit decisions appears correct for a customer who intends to order $1,000 of goods annually that have a 20% profit margin if the probability of default is 20% and the discount rate is 10%?

• A) Reject because expected loss equals $320
• B) Reject because expected profit equals $0
• C) Accept because expected profit equals $1,440
• D)Accept because expected profit equals $3,200

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Definitions:

Inflation Rate

The inflation rate measures how much the general level of prices for goods and services is rising, and, subsequently, how purchasing power is eroding over time.

Standard Deviation

A statistical measure of the dispersion or variability of a set of data points, often used to quantify the risk associated with a particular investment or portfolio.

Gold Stock

Shares in gold mining companies or in exchange-traded funds or instruments that invest in gold.

Good Economy

A state of economic prosperity characterized by high employment, steady growth, and controlled inflation.