Econ final test finance&econ interest

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Econ 325 Spring 2020 Final Exam Part A Due Date: Thursday, May 14 at 11:30 pm on D2L Exam Format • There are 6 short answer questions and 2 math questions (for a total of 8) • There 100 points on the exam.

• 20 points for just submitting the exam • 10 points for problems 1 through 8 (total 80)

Exam Rules • This exam is open notes. • You are allowed to access information on D2L while taking this exam. • You may use a calculator on this exam. • No collaboration, sharing answers, or copying work is allowed during the exam. • There is no time limit on the exam as long as the exam is submitted by the due date and due time. Academic Integrity Rules • Students must work by themselves once they have started the exam. • Students may not communicate with someone else (on exam material) once they start taking the exam. • Students may not communicate with other students who have started their exams (or started and finished their exams) before taking their exams. Submission Rules • Write your answers in Word (or Pages) document or on paper. • When done, save your Word file as a PDF or scan your paper answers to a PDF. • You must explain your answers for full credit. • You may resubmit work up until the due date and time. Key Formulas With two points and the two-point form of a line is:

or

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Short Answer Questions 1. Truth in lending act.

a) Describe what was going on with consumer lending in the US that caused the act to be created.

b) What did the Act did do, that is, what were the changes caused by the Act? 2. Equal Opportunity Credit Act

a) Describe what was going on with consumer lending in the US that caused the act to be created.

b) What did the Act did do, that is, what were the changes caused by the Act? 3. Fair Reporting Credit Act

a) Describe what was going on with consumer lending in the US that caused the act to be created.

b) What did the Act did do, that is, what were the changes caused by the Act? 4. Fair Debt Collections and Practices Act

a) Describe what was going on with consumer lending in the US that caused the act to be created.

b) What did the Act did do, that is, what were the changes caused by the Act? 5. FICO scores.

a) Describe what a FICO score is. b) Consumers get general information about FICO score calculations. Why do you

think the exact formula for the FICO scores are kept secret? 6. As a result of the current coronavirus crisis

a) What do you think will happen to the average FICO score in the United States? Explain.

b) What do you think will happen to the amount of money banks have subject to collections?

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Math Problems 7. Suppose that a credit card company uses FICO scores to predict new customer

defaults. It turns out that for the company, FICO scores have been related to the ln(odds) of a default on a loan. (The credit card company expects this relationship will continue and so can make predictions based on past experiences.)

The relationship between FIFO scores and loan defaults is given by:

𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙(𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 − 𝑙𝑙𝑜𝑜𝑜𝑜) = 7.50 − 1

60 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹

Explain your work correctly and clearly for full credit.

(a) What is the predicted probability of a loan default for someone with a FICO score of 780?

(b) What is the predicted probability of a loan default for someone with a FICO score of 640?

(c) The risk department at the credit card company wants to approve only applicants (or new customers) if the predicted probability of a default is 7% or less. What FICO scores would be declined?

8. Suppose that you wish to build a credit model where the probability of default is 50% at a score of 300 and the odds of not-defaulting doubles for every 60 points.

Explain your work correctly and clearly for full credit.

(a) Provide a linear equation for your credit model.

(b) What score is associated with a probability of default of 5%? Round down to the nearest integer.

(c) A score of 480 is associated with what probability of default?