NAME :Yashveer Rana

Contact Number:9953120888
Email:yashveer.rana@yahoo.com

SCENARIO 1

Assumption: Loss rate of 3% is assumed to be

borrowers’ default on their entire balance and fees and
operating costs takes place every month.

Q-1) Profit per card (yearly basis)

 Membership plus affiliation fee is revenue for the
company=(20+10)*12=360
 Operating cost per card=25*12=300
 The principle source of revenue for this company
is interest payments when outstanding balance at
the end of the month is carried from 1 month to
another. Assuming 5 percent of account holders
are in this category, we have Interest earned(I)
 I=1000*0.05*0.15*365=2738(365 due to daily basic
condition)
 Cost of funds=1000*12*0.065=780
 Loss due to borrowers’ default=1000*0.03*12=360

PROFIT= (360+2738) -(300+780+360) =1658

Q-2) When average balance is increased to 2000
 I=2000*0.05*0.15*365=5475
 Cost of funds=2000*12*0.065=1560
 Loss due to borrowers’ default=2000*0.03*12=720
This means all the values that are affected by balance
are twice the amount that we calculated earlier.

Q-3) The person with a high balance is more likely to

default because of the following reasons:
 The credit score of that individual is low, leaving

less scope for taking loan or debt in future which

in case of less liquidity won’t allow him to pay for
his previous debts or loans.
 Because of his low cash balance, he has

accumulated a high outstanding credit balance

which makes it difficult for him to choose between
present consumption or paying off debt, and in
most cases, consumption is chosen over debt
payment.
 The high outstanding balance is accumulated due

the individual’s high spending habit, which will not

reduce instantly putting him in a position of
continued high spending in the future thus
increasing a chance of default in the future.
Q-4) Profit for the affiliated group=1658-20=1638 (since
the profit which we calculated earlier will be used as a
profit for the affiliated group as now they are basically
same)

Q-5) The company can reduce its membership and

affiliation fee to an extent of both being equal to 0. This
would not lead to a loss for the financial company as its
major revenue comes through interest payments.

The company can reduce the interest rate up to an

extent of 8%, because any interest rate lower than 8%
will lead to a loss for the financial institution.

SCENARIO 2
ASSUMPTION: Loss rate of 3% is assumed to be
borrowers’ default on their entire balance and fees and
operating costs takes place every month.

Since, in this scenario the average card balance and

members are growing each month, the total amount(A)
for the full year will be equal to A=1000 +
1000(1.05)(1.05) + 1000(1.05)^4…….+1000(1.05)^22
A=1000(1 – ((1.05)^2)^12)/(1-(1.05^12))
A=21708

To make calculations easy, we will use average

value=21708/12=1809
Profit per card (yearly basis)
 Membership plus affiliation fee is revenue for the
company=(20+10)*12=360
 Operating cost per card=25*12=300
 The principle source of revenue for this company
is interest payments when outstanding balance at
the end of the month is carried from 1 month to
another. Assuming 5 percent of account holders
are in this category, we have Interest earned(I)
 I=1809*0.05*0.15*12=162(12 due to monthly basis
condition)
 Cost of funds=1809*12*0.065=1411
 Loss due to borrowers’ default=1809*0.03*12=651

LOSS=(360+162)-(300+1411+651)=-1840

Q-2) Loss due to borrowers’ default=2000*0.03*12=720

Q-3)The person with a high balance is more likely to

default because of the following reasons:
 The credit score of that individual is low, leaving

less scope for taking loan or debt in future which

in case of less liquidity won’t allow him to pay for
his previous debts or loans.
  Because of his low cash balance, he has
accumulated a high outstanding credit balance
which makes it difficult for him to choose between
present consumption or paying off debt, and in
most cases, consumption is chosen over debt
payment.
 The high outstanding balance is accumulated due
the individual’s high spending habit, which will not
reduce instantly putting him in a position of
continued high spending in the future thus
increasing a chance of default in the future.

Q-4) loss for the affiliated group=-1840-20=-1860 (since

the profit which we calculated earlier will be used as a
profit for the affiliated group as now they are basically
same)
Since, there is a loss situation in this scenario it is highly
unlikely that the affiliated group would want to buy the
members.

Q-5)Since, the financial institution is already in a loss,

they will not decrease any numbers any further.