A Researcher Wants to Examine How the Remaining Balance on $100,000

question 5

Multiple Choice

A researcher wants to examine how the remaining balance on $100,000 loans taken 10 to 20 years ago depends on whether the loan was a prime or subprime loan. He collected a sample of 25 prime loans and 25 subprime loans and recorded the data in the following variables: Balance = the remaining amount of loan to be paid off (in $) ,
Time = the time elapsed from taking the loan,
Prime = a dummy variable assuming 1 for prime loans, and 0 for subprime loans.
The regression results obtained for the models:
Model A: Balance = β₀ + β₁Prime + ε
Model B: Balance = β₀ + β₁Time + β₂Prime + β₃Time × Prime + ε
Model C: Balance = β₀ + β₁Prime + β₂Time × Prime + ε,
Are summarized in the following table. Note: The values of relevant test statistics are shown in parentheses below the estimated coefficients.
Which of the following three models would you choose to make the predictions of the remaining loan balance?

• A) Model A
• B) Model B
• C) Model C
• D) Any model

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Definitions:

Capital Structure

The mix of different forms of external financing used by a company, including debt, equity, and hybrid securities.

Tax Shield

The decrease in income tax liability achieved by subtracting permissible deductions like mortgage interest or depreciation from one's taxable income.

Capital Structure

The assortment of loans and equity a firm leverages to finance its daily workings and growth aspirations.

Legal Obligation

A duty enforced by law that requires an entity or individual to perform or refrain from certain actions.