Applicants for single period loans of $1,500,000 at the contracted interest rate of 3.0% per annum (p.a.) have been assessed to a range of default probabilities. The bank can finance these loans at the risk-free rate of 1.25% p.a. What is the cut-off default probability? What implication does this result have for the bank’s screening function?

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Cutoff Default Probability and Screening Function To determine the cutoff default probability we nee... View the full answer