Follow Us :

Quantitative Methods Q185

0. Finnish Mortgage Holding Company estimated that about 5 percent of its mortgage holders default. Out of those who default, 80 percent of them make payments a month late as compared to 60 percent of those who do not default. The probability that a mortgage with late payments will default is closest to:=

  • Option : B
  • Explanation : Based on the information presented, Bayes‟ formula can be applied. The first step is to note down the various probabilities given: P (Default) = 0.05 P (No default) = 0.95 P (Delayed payments | Default) = 0.80 P (Timely payments | Default) = 0.20 P (Delayed payments | No default) = 0.60 P (Timely payments | No default) = 0.40 P (Event | Information) = [ P (Information | Event) / P (Information) ] * P (Event) In this case, „delayed payments‟ is the information and „default‟ is the event. The formula can be written as. P (Default | Delayed payments) = [ P (Delayed payments | Default) * P (Default) ] / { [ P (Delayed payments | Default) * P (Default) + P (Delayed Payments | No default) ] } P (Default | Delayed payments) = [ 0.80 * 0.05 ] / [ (0.80 * 0.05) + (0.60 * 0.95) ] = 0.07
Cancel reply

Your email address will not be published. Required fields are marked *


Cancel reply

Your email address will not be published. Required fields are marked *