BUSINESS CASE .... DUE IN 5 HOURS

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Royal Bank of Midwest
Student Coaching Notes

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Concepts Covered

  • Statistics

  • Macroeconomics

  • Ethics

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  • Simple linear regression formula: y = a + bx

  • y = dependent variable = predicted value

x = 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.

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