Question: Q4 (15 points) A borrowing sovereign has its output fluctuating following a uniform distribution U[16, 24). Suppose that the government borrows L = 6 before

Q4 (15 points) A borrowing sovereign has its output fluctuating following a uniform distribution U[16, 24). Suppose that the government borrows L = 6 before the output is known; this loan carries an interest rate r The loan is due after output is realized. Suppose that if the government defaults on the loan, then it faces a cost equivalent to c = 0.5 of its output. The loan is supplied by competitive foreign creditors who has access to funds from world capital markets, at a risk-free interest rate of 12.5% ** Part a. (5 marks) Find the equilibrium L. ** Part b. (5 marks) What is the probability that the government will repay its loan? **Part c (5 marks) Would the borrowing country default if ry=r? Prove it. Q4 (15 points) A borrowing sovereign has its output fluctuating following a uniform distribution U[16, 24). Suppose that the government borrows L = 6 before the output is known; this loan carries an interest rate r The loan is due after output is realized. Suppose that if the government defaults on the loan, then it faces a cost equivalent to c = 0.5 of its output. The loan is supplied by competitive foreign creditors who has access to funds from world capital markets, at a risk-free interest rate of 12.5% ** Part a. (5 marks) Find the equilibrium L. ** Part b. (5 marks) What is the probability that the government will repay its loan? **Part c (5 marks) Would the borrowing country default if ry=r? Prove it

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

31.25 pts A retail tenant pays percentage rent of 3% over a natural breakpoint based upon a rental rate of $10 per square foot. The tenant leases 4,000 square feet and is estimated to generate...

A borrowing sovereign has its output fluctuating following a uniform distribution [16,24] U [ 16 , 24 ] . Suppose that the government borrows =6 L = 6 before the output is known; this loan carries an...

2. A borrowing country has a fluctuating level of output Y. Specifically, Y follows a uniform distribution U [16, 24]. Suppose the government takes out a one-period loan L = 6 that carries an...

Please solve questions, and shift the graphs where it needs to be. 2. 2. The theory of liquidity preference and the downward-slopingaggregate demand curve The following graph shows the money market...

Question 1(Multiple Choice Worth 1 points) (02.06 MC) Suppose Country 'X' is producing an output of 300 units of a certain good at $3 per unit in 2017. With time, the price level rises from $3 per...

Table of z values and probabilities for the standard normal distribution. z is the first column plus the top row. Each cell shows P( X z). For example P( X 1.04) = .8508. For z

HI PLEASE ANSWER ALL 78 MULTIPLE CHOICE QUESTIONS THANK YOU 1. Which of the following will lead to a decrease in both equilibrium price and quantity in a market? a)A decrease in demand b)An increase...

3 COLLEGE ALGEBRA - TRIGONOMETRY Business and Finance (MAT115) This course will start with a review of basic algebra (factoring, solving linear equations, and equalities, etc.) and proceed to a study...

Vwalika plc was created on 1 January 2010 with a share capital of K150,000, fully paid in cash on that date. The price level index at that date was 100. The following transactions were recorded:...

QUESTION 1 For barter to occur there must be a double coincidence of wants for each good to be exchanged. one person who pays cash. two people willing to pay with credit. hyperinflation. 1.11 points...

A crutch is pressed against the sidewalk with a force F c along its own direction as in Figure. This force is balanced by the normal force F n and a frictional force fs. (a) Show that when the force...

Let f(x) be a continuous function defined for 0 x 1. Consider the functions (called Bernstein polynomials) and prove that Let X1, X2, . . . be independent Bernoulli random variables with mean x....

All the following statements concerning traditional split-dollar life insurance plans are correct, EXCEPT: The corporation receives death proceeds in an amount equal to the net amount at risk. The...

10) For a bond that pays cash interest (i.e., not a zero coupon bond), YTM is (a) always equal to the coupon rate (b) always equal to the current yield (c) is always less than the coupon rate (d) can...

5. In small groups in your class, discuss how popular culture and films portray interpersonal relationships, considering specifically relationship stages. Discuss communication techniques that the...

4. As a new romantic relationship begins, keep a journal of the communication events that occur. In this journal, indicate the stage you perceive the relationship to be in (based on the stages in...

3. Consider a romantic relationship that has ended. Using the stages outlined in this chapter, create a time line of the relationship. Include significant turning points that encouraged the...