(Default) The Republic of Delinquia has a non-disaster output level of $100 each year. With 10% probability...
Question:
a. What is the probability of default in Delinquia?
b. The interest rate on safe loans is 8% per annum, so a safe loan has to pay off 1.08 times $20. What is the lending rate charged by competitive lenders on the risky loan to Delinquia?
c. What does Delinquia consume in disaster years? In non-disaster years?
d. Repeat part (c) for the case in which Delinquia cannot borrow. Is Delinquia better off with or without borrowing?
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Related Book For
International Economics
ISBN: 978-1429278447
3rd edition
Authors: Robert C. Feenstra, Alan M. Taylor
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