What is the minimum interest rate the bank should charge if the bank wants to break...
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What is the minimum interest rate the bank should charge if the bank wants to break even? • Assume the size of loan is 100. • Notation: r = interest rate π = profit Exp(n)= expected profit B = principal + interest : 100(1+r) = which borrowers find this interest rate profitable? • if r = 33.3%, which borrowers are going to borrow? Safe projects pays 150 with probability 100% • Safe borrowers, if r = 33.3%, have to pay back 133.3. ● What is the minimum interest rate the bank should charge if the bank wants to break even? • Assume the size of loan is 100. • Notation: r = interest rate π = profit Exp(n)= expected profit B = principal + interest : 100(1+r) = which borrowers find this interest rate profitable? • if r = 33.3%, which borrowers are going to borrow? Safe projects pays 150 with probability 100% • Safe borrowers, if r = 33.3%, have to pay back 133.3. ●
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To break even the banks profit should be zero which means that its expected profit should equal the ... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date:
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