Question

You're attempting to anticipate if a customer loan will default. based on the characteristics, you calculated a probability of 0.70. what does this estimated probability mean?

(1) there is a 30% chance that the loan will default
(2) there is a 70% chance that the loan will default
(3) there is a 70% chance that the loan will not default
(4) there is a 30% chance that the loan will not default
answer choices select only one option
O 1 and 2
O 1 and 4
O 2 and 4
O 1 and 3

Answer 1

The calculated probability of 0.70 means there is a 70% chance the loan will default. This is critical in business and finance where banks must account for the risk of defaults in their planning.

Step-by-step explanation:

The estimated probability of 0.70 means that there is a 70% chance that the loan will default, which is option (2). Conversely, there is a 30% chance that the loan will not default, but this statement is not one of the provided options.

Understanding probabilities is crucial in business and finance, as banks need to plan for potential loan defaults. They calculate the expenses and adjust the value of their loans to account for this risk. Still, if actual defaults exceed the anticipated number, it can significantly impact the bank's financial health, as seen in the scenario where a bank's loan value declines from $5 million to $3 million, leading to negative net worth.

The estimated probability of 0.70 means that there is a 70% chance that the loan will default. It indicates the likelihood of the loan not being repaid on time or at all. As a predictor of loan default, this probability suggests a relatively high risk of default.