A competitive lender makes loans to a pool of borrowers that are identical. After borrowers have received their loans they choose one of two investment projects. with probability Pg. With probability 1 – Pg, Project G pays a rate of return of -1, the borrower defaults on the loan, and the lender receives Project G pays the borrower a rate of return of r. nothing. Project B pays the borrower a rate of return of rB with probability pp. And with probability 1 – Pb, Project B pays a rate of return of -1, the borrower defaults on the loan, and the lender receives nothing. < rb, Pg > Pb, and P,(1+ rg) > Po(1+ rb). Suppose rg 0.98, pr = 0.4, rp = 0.02, L = 1. We assume as usual that rg 0.10, rb 0.12, Pg %3D The lender can't distinguish between borrower types and so it charges all borrowers the same interest rate rL. The lender lends an amount L and pays interest rp on funds acquired from depositors. Round your answer to at least three decimal places. Suppose that rL 0.15. Compute the collateral to loan ratio c, that ensures that the borrower is indifferent between the projects G and B. Round your answer to at least three decimal places.

A competitive lender makes loans to a pool of borrowers that are identical. After borrowers have received their loans they choose one of two investment projects. with probability Pg. With probability 1 – Pg, Project G pays a rate of return of -1, the borrower defaults on the loan, and the lender receives Project G pays the borrower a rate of return of r. nothing. Project B pays the borrower a rate of return of rB with probability pp. And with probability 1 – Pb, Project B pays a rate of return of -1, the borrower defaults on the loan, and the lender receives nothing. < rb, Pg > Pb, and P,(1+ rg) > Po(1+ rb). Suppose rg 0.98, pr = 0.4, rp = 0.02, L = 1. We assume as usual that rg 0.10, rb 0.12, Pg %3D The lender can't distinguish between borrower types and so it charges all borrowers the same interest rate rL. The lender lends an amount L and pays interest rp on funds acquired from depositors. Round your answer to at least three decimal places. Suppose that rL 0.15. Compute the collateral to loan ratio c, that ensures that the borrower is indifferent between the projects G and B. Round your answer to at least three decimal places.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 16MC: When using the NPV method for a particular investment decision, if the present value of all cash...

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