Assume a money market with safe and risky borrowers. The MFI's that is ready to lend...

  

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Assume a money market with safe and risky borrowers. The MFI's that is ready to lend money does not know who is safe and who is risky. However experience has led the MFI to know that 50% of the borrowers are safe. Given that the risky borrower's probability to succeed is 75% and that the loan amount is $100 for both the risky and safe borrower. i) Calculate the expected gross revenue for each borrower if the gross revenue is $200 and $267 for the safe and risky borrower respectively ii) Suppose the contract terms are that the: 0 MFI charges 50% interest Groups constitute of two members only (4 marks) Borrower pays Kshs. 0 if their business fail and Additional payment due if borrower's partner fail is $117 Calculate the borrower's expected net returns if: A safe borrower has a safe partner (4 marks) A safe borrower has a risky partner (4 marks) A risky borrower has a safe partner (4 marks) iii) A risky borrower has a risky partner Show that adverse selection cannot be experienced in this money market (4 marks) (5 marks) Activate Wi Assume a money market with safe and risky borrowers. The MFI's that is ready to lend money does not know who is safe and who is risky. However experience has led the MFI to know that 50% of the borrowers are safe. Given that the risky borrower's probability to succeed is 75% and that the loan amount is $100 for both the risky and safe borrower. i) Calculate the expected gross revenue for each borrower if the gross revenue is $200 and $267 for the safe and risky borrower respectively ii) Suppose the contract terms are that the: 0 MFI charges 50% interest Groups constitute of two members only (4 marks) Borrower pays Kshs. 0 if their business fail and Additional payment due if borrower's partner fail is $117 Calculate the borrower's expected net returns if: A safe borrower has a safe partner (4 marks) A safe borrower has a risky partner (4 marks) A risky borrower has a safe partner (4 marks) iii) A risky borrower has a risky partner Show that adverse selection cannot be experienced in this money market (4 marks) (5 marks) Activate Wi

Answer rating: 100% (QA)

Money Market Analysis i Expected Gross Revenue Safe Borrower Probability of success safe borrower always succeeds by assumption 100 Gross revenue on s... View the full answer