Question: Question 3 Given the following data from ABC Bank's record. Loan default rate Loan interest rate 3% 0.6% 4% 1.1% 5% 6% 7% 2.3% 4.1%

Question 3 Given the following data from ABC Bank's record. Loan

Question 3 Given the following data from ABC Bank's record. Loan default rate Loan interest rate 3% 0.6% 4% 1.1% 5% 6% 7% 2.3% 4.1% 5.5% (a) Estimate the expected return on loan to ABC bank at each loan interest rate. Assume that there is no recovery value in a loan default. (15 marks) (b) Critically explain the relationship between the loan interest rate and expected return on loan and charging high interest rate to borrowers does not always increase the profit to a bank. (10 marks) (Total: 25 marks)

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