A bank issues a $1,440 loan to a borrower, who will repay the loan with a...
A bank issues a $1,440 loan to a borrower, who will repay the loan with a probability of 86%. In this case, the competitive interest rate the bank can afford to offer is
Group of answer choices
21%
18.8%
16.3%
14.5%
Homework Answers
Suppose bank charges a rate of X%. Then bank will be receiving 1440 + 14.40X in case the loan is repaid. The expected amount of loan bank will be receiving is E(L) = 0.86*(1440 + 14.40X) + 0.14*0 and this should be enough to cover the loan of 1440. Hence we have
0.86*(1440 + 14.40X) = 1440
1238.40 + 12.384X = 1440
X = (1440 – 1238.40)/12.384 = 16.3%
Select 16.3%
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