Date of Award

1993

Degree Type

Thesis

Degree Name

Bachelor of Business Honours

Faculty

Faculty of Business

First Advisor

Ray Boffey

Abstract

This paper sets out to examine the influence of variables that affect the pricing of commercial loans within the context of the R&I Bank. This will be achieved by collecting financial information on past business loan pricing decisions from a specific R&I Bank branch selected. The information so collected would be analysed from the viewpoint of understanding the pricing of risk. Of specific interest is the examination of loans in a branch to find out the distribution of loans across the spread of credit risk premiums. A credit risk premium, also referred to as the interest rate margin (IRM), is arrived at by subtracting the base rate (or reference rate) from the interest rate charged on the loan. The distribution of loans across a given credit risk premium will be examined by looking at the number of loans in a particular credit risk premium spread (Chp. 4). Subsequently this paper also seeks to identify variables which play a important role in the decision to grant credit (i.e. give a loan). The latter part of the paper will seek to examine the degree of relationship these variables have in influencing the credit risk premium charged on business loans. Thus this paper involves two analyses. The first part looks at the distribution of the loans across a spread of credit risk premiums. The second part looks at the variables that influence the determination of credit risk premiums that are charged by the bank to cover the risk of a given loan.

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