Chapter 1.5, Problem 29PFA

a

To determine

To find:The metric that gives ratio lower than $0.3$ .

Answer to Problem 29PFA

Only option $\begin{array}{l}\\ C\end{array}$ gives ratio below $\begin{array}{l}\\ 0.3\end{array}$ , it should be used by the lending institution.

Explanation of Solution

Given Information:An excel sheet containing concerned data and four options.

Calculation:

Total monthly debt is synonymous to total monthly expenses in the given case,

  $\begin{array}{l}A.\frac{TotalMonthlyDebt}{MonthlySalary}=\frac{1720}{4950}\approx 0.34\\ \\ B.\frac{TotalLoanPayments}{MonthlySalary}=\frac{CreditCards+HEL+SL}{4950}=\frac{770}{4950}\approx 0.155\\ \\ C.\frac{\mathrm{Re}nt+HEL}{MonthlySalary}=\frac{1350}{4950}\approx 0.27\\ \\ D.\frac{monthlysalary-totalmonthlydebt}{MonthlySalary}=\frac{4950-1720}{4950}\approx 0.65\end{array}$

Thus, only option $\begin{array}{l}\\ C\end{array}$ gives ratio below $\begin{array}{l}\\ 0.3\end{array}$ , it should be used by the lending institution.

b

To determine

To make:A conjecture regarding institution’s decisionregarding not using a metric.

Answer to Problem 29PFA

Other ratios related to debt and rent etc. can give a simple understanding of eligibility of the candidate to receive loan.

Explanation of Solution

Given Information:Metric is $D.\frac{monthlysalary-totalmonthlydebt}{MonthlySalary}=\frac{4950-1720}{4950}\approx 0.65$ .

Institution could have taken this decision because out of all metrics discussed in previous part, this one is the odd as it gave the largest value $0.65$ . Metricsthat providelow values seem to be more convenient in some cases. Moreover, the value of monthly salary is used twice in this ratio while there are other ratios related to debt and rent etc. that can give a simple understanding of eligibility of the candidate to receive loan.

c

To determine

To find:The absence of debt affects the decision of lending institution to approve loan.

Answer to Problem 29PFA

All the ratios will go down to $0$ except $D$ . Decision will be affected in a positive way

Explanation of Solution

Given Information:The candidate Viola has no monthly debt.

As the candidate doesn’t have any outstanding debt, all the ratios will go down to $0$ , the lowest, except $D$ which will soar to $1$ . It affects the lending institution’s decision in a positive way and institution will most probably give loan to such a candidate with no loan.