WELCOME TO MAT116Fall 2003

Instructor Information

Lawrence Morales Office: 5137 Phone: 587-6992 E-Mail: Lmorales@sccd.ctc.edu Office Hours: T, Th 9 to 10 AM http://www.seattlecentral.org/faculty/LMorales/www116/

Course Prerequisites

MAT098 with 2.5 or higher in the last 3 years

Appropriate placement exam score in the last 3 years

Prerequisites will not be waived.

Course Co-Requisite

MAT298B is required with this course Choose T, W, Th, or Fri session of this

week Please enroll in a section soon if you

have not done so already Course content…

Course Details: Intro

100% Business Focus Designed for business majors If you are not a business major, then

then MAT103, 107, or 109 are probably better alternatives for you. MAT122 is for those going into the sciences.

CRAFTY Workshop

University of Arizona meeting of the MAA

Business deans and math faculty from all over the U.S. meet to discuss what business schools want their students to experience in math courses.

CRAFTY Recommendations

Stress problem solving, including recognition of ambiguities.

Stress conceptual understanding (motivating the math with the “whys”– not just the “hows.”)

Stress critical thinking.

CRAFTY Recommendations

Develop appropriate models to solve defined problems.

Use industry standard technology (spreadsheets).

Become conversant with mathematics as a language. Business faculty would like its students to be comfortable taking a problem and casting it in mathematical terms.

CRAFTY Recommendations

“In general, business faculty are less concerned with specific course content than with adherence to the notion of developing quantitative literacy and analytical ability in our students. Upon completion of a business math curriculum the students should be comfortable with using mathematics as a tool to communicate analytical concepts.”

CRAFTY Recommendations

“Business decisions are most commonly made under conditions of uncertainty and risk. Inferences must be drawn from data and information that is incomplete, inconclusive, and most likely imprecise. Wherever possible, math courses should attempt to illustrate this ambiguity and provide guidance in dealing with such uncertainty and variation.”

CRAFTY Recommendations

In order to achieve the desired outcomes, the business faculty recommends that the curriculum include: Realistic business problems. Spreadsheet solutions. Real data sets. Problem motivated modeling. Development of students’ abilities to express

things analytically using algebraic articulation and symbolic notation.

Sensitivity analysis.

This Course and CRAFTY

This course is designed to meet almost all of the recommendations put forth by the CRAFT workshop participants.

Course Structure

The course revolves around two major projects: Project 1: Loan Foreclosures Project 2: Stock Option Forecasting

We learn the math we need as we go along and make significant use of technology.

Both projects are completed in teams of 3 or 4 students.

Course Activities

ClassProject

TeamProjects

TeamsFormed

PreliminaryReports

SolutionOralReports

WrittenReports

Toolsand

Homework

ProjectIntroduction

Course Assumptions

In this course, we will assume that you are in a business setting. Hence expectations include: Team cooperation Work of the highest quality Professional behavior and attendance

Team Cooperation

Significant time outside of class will be needed to complete the projects and do a good job.

We will assume that the instructor is a client that is putting out a request for sample work and will use the quality of the work to make a final hiring decision.

Team Cooperation

The biggest struggles in this course arise when teams are dysfunctional.

EVERY member of the team must participate and do their share of the work.

Do not stay enrolled in this course if you cannot make a commitment to your teams.

Work Quality

Your oral and written team presentations should be of the highest quality and reflect a level of professionalism typical of a business environment.

Use Equation Editor (covered in 298B) to format all mathematical content.

Professionalism

The highest degree of professionalism is expected.

Like in the work world, regular and prompt attendance is expected and may be used as part of the grade if standards are not met by the class.

Professional behavior in and out of class will be the expected norm.

Homework for Tonight

Homework to be finished before the second class meeting: Carefully read the syllabus and bring

questions to class. Purchase Text (Part 1) at Perfect Copy

(Corner of Broadway and John St.) Fill out Syllabus Acceptance Form and

bring to class Fill out Team Assignment Form

Team Assignment Form

Project 1 Background

Loan Foreclosures

Project 1 BackgroundA bank is a financial institution that transforms savings into capital investment. People and companies deposit excess cash in banks, which in turn lend these funds to other people and companies. The money is then invested in productive capital.

Banks make both personal and commercial loans. In a personal loan the borrower receives an amount of money which he or she pays back in monthly installments. The borrower also pays monthly interest on the outstanding principal. In a commercial or business loan the borrower keeps the entire amount of the loan for a fixed period of time, and then returns the principal as a lump sum payment. While he or she has the money the borrower must make regular payments of interest on the loan. We will only consider commercial loans.

The most important problem that a bank confronts is to whom it should lend. It makes this decision by processing information about the prospective borrower, and the proposed investments.

More BackgroundSince commercial loans are risky, the bank continually monitors borrowers. Should a borrower fail to make expected interest payments, the bank has to decide whether or not it should foreclose on the loan. In many cases, foreclosure means that the bank takes over ownership of a particular asset (the collateral for the loan), and sells this asset in the market.

If it does not foreclose, the bank can attempt to salvage the loan by setting up a new schedule of interest payments or by temporarily deferring such payments. These actions are called a loan work out.

The choice of whether to work out a loan or foreclose is a complex one. In many cases, foreclosure would force the borrower into bankruptcy. The key issue in a work out decision is the long-run viability of the borrower.

More BackgroundThe bank has to decide whether the borrower has missed his or her recent payments because of temporary illiquidity or if there is a permanent problem. If it is the former, a work out may be indicated. If it is the latter, foreclosure may be appropriate.

Given the importance of the work out or foreclose decision, many banks that lend to smaller and medium size companies force the borrowers to have an exclusive borrowing relationship. This enables the lending bank to make the work out decision by itself. (The law requires that all lenders must agree to a work out plan.)

To protect itself against litigation, a bank must base the decision about whether or not to attempt a work out arrangement on quantifiable considerations. This often involves the use of historical data on past borrowers. To be effective, the use of data must take into account specific information about an individual borrower and about the current economic conditions.

More BackgroundAcadia Bank has a commercial loan with a full value of $4,000,000 outstanding to John Sanders’ entrepreneurial venture. This loan has a 10% interest rate, is one year old, and is scheduled to terminate in four years.

The last interest payment was due three weeks ago, and John was unable to make the payment. In fact, the bank has recently audited John’s books, and discovered that, for the moment, the venture is illiquid, and will be unable to make interest payments for at least the next three months.

Acadia has to decide whether to foreclose on the loan, which would put John out of business, or to work out a new schedule of payments. Acadia knows that if it forecloses on John’s loan, it will only recover a foreclosure value of $2,100,000 on the $4 million loan.

If it were to enter into a work out arrangement, there is some chance that the entire loan would be re-paid, and the on-going relationship with John would adequately compensate the bank for the costs of the work out and any lost interest.

More BackgroundIf Acadia Bank attempts a work out, and John's venture fails anyway, then the business will have further decreased in value and the bank will only recover a default value of $250,000 on its loan.

The problem confronting the bank is whether or not to work out the loan with John. In order to make this decision, the bank would like to know the expected value of a work out. Acadia Bank is the result of a merger between three banks. Unfortunately, each of these banks kept different kinds of records on the success or failure of past work out attempts.

The former BR Bank has work out records which include the number of years of experience that the entrepreneur had in his or her current line of business. The former Cajun Bank has work out records which include the entrepreneur's education status (whether the highest education level is: high school, a bachelor's degree, or a graduate degree). Finally, the former DuPont Bank has work out records which include the state of the economy at the time of the work out (whether the economy was in a recession, in normal times, or in a boom). Each of the three former banks made loans to very similar populations of borrowers.

More BackgroundEach of the former banks had data on several thousand individual work outs. The combined records that are available to Acadia Bank are shown in the Excel file Loan Records.xls.

Conventional wisdom in the banking business indicates that the number of years of business experience of a borrower, educational level of a borrower, and the current economic conditions are all independent of each other. Moreover, these factors are independent, even if only successful loan work outs or only failed work out attempts are considered.

The following demographic and economic data characterize John’s current situation.

John has seven years of experience in this kind of business.

John has a Bachelor’s degree in Business Administration.

The economy is currently in “normal times.”

Armed with this data, should Acadia Bank enter into a work out agreement with John, or should it foreclose on the loan?

More BackgroundEach team of students will receive information about a borrower who has fallen behind with interest payments on a commercial loan from Acadia bank. This information will include the full value of the loan, the foreclosure value, the default value, and properties of the borrower and current times.

Specifically, teams will know the number of years experience that the borrower has in his or her type of business and the highest educational level of the borrower: High School, Bachelor’s Degree, or Graduate Degree. Teams will also know the current economic conditions: Recession, Normal, or Boom.

Each team must use the Acadia Bank records and all information about its particular borrower to decide if Acadia Bank should enter into a work out agreement with the borrower, or if it should foreclose on the loan now.