Question
1 a)Suppose a borrower with a 25% risk of default and no collateral wants to borrow from a lender whose alternative rate of return is
1 a)Suppose a borrower with a 25% risk of default and no collateral wants to borrow from a lender whose alternative rate of return is 5%. What is the lowest interest rate that the lender will charge? [Enter your solution as a percent, e.g.
10 means 10%]
b) Take the same scenario as earlier (default rate of 25%, 5% safe alternative for lender) but now assume that the lender must pay a fixed cost of $0.75 to screen and monitor borrowers. If the borrower wants a loan size of $5, what is the lowest interest rate than the lender will charge? [Provide the % interest rate as a number, e.g. 10 means 10%]
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