The average cost of funds for First National Bank of College Park (FNBCP) is 4%. The bank issues credit cards and wants to maintain a net margin of 6 percentage points on the credit card operation. The average credit card balance is $3,000.
Assume two groups of borrowers: 10% of borrowers are ?bad credit? with 20% (1 in 5) chance of default and 90% of borrowers ?good credit? with 1.11% (1 in 90) chance of default. This is public information. What interest rates should FNBCP charge each group in order to maintain the net margin of 6 percentage points?
I"m thinking this:
Hypothetically let's assume 100 pple have an account. So we're workign w/ a total of 100x3,000=$300,000.
ave cost of funds =4% = $12,000.
10 pple are bad. so $300,000 / 10 = $30,000 bad money. of that 20% is defaulted, so .2 x 30,000 = $6,000.
90 pple are good. so $300,000 / 90 = $3333.33, of that 1.11% defaults, so .0111 x $3333.33 = $37.00
6% points would yeild $300,000 x 1.06 = $318,000
...stumped
Assume two groups of borrowers: 10% of borrowers are ?bad credit? with 20% (1 in 5) chance of default and 90% of borrowers ?good credit? with 1.11% (1 in 90) chance of default. This is public information. What interest rates should FNBCP charge each group in order to maintain the net margin of 6 percentage points?
I"m thinking this:
Hypothetically let's assume 100 pple have an account. So we're workign w/ a total of 100x3,000=$300,000.
ave cost of funds =4% = $12,000.
10 pple are bad. so $300,000 / 10 = $30,000 bad money. of that 20% is defaulted, so .2 x 30,000 = $6,000.
90 pple are good. so $300,000 / 90 = $3333.33, of that 1.11% defaults, so .0111 x $3333.33 = $37.00
6% points would yeild $300,000 x 1.06 = $318,000
...stumped
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