1. Gounidet an cconomy with a bank and two types of risky borrowers. Each type of borrower requires a loan for a project with an uncertain return. Borrower A's project has a return of either 10% or 056 , and esch retum is equally likely. Borroser B's project has a return of 1008 with probahility 0.1, otherwise the return is 0%. The batnk can make money by issuing loans to the borrowers but also has the option to purchise a Government bond with a guaranteed return of 2%. Bortowers will always repay the face value of their loans, but will only be able to repay the interest payments if it is less than the return on their project. (a) What are expected regarns of the two risky projects? (b) Suppose the bank can distinguish between the two types of borrowens. What is the ramallest interest rate the bank would charge each type of agent to make the loans worthwhile? (c) Now suppose that the bank cannot distinguish between the two types of bexrowers. If 75% of borrowers are type A, what is the lowest common interest rate it that the brank could charge for the loatis to be worthwhile? (d) Which types of borrosem yould agrie to barrow at the interet rate you calculated in part (e)? Would the bank higree to lend at this interest ratel (e) Repeat parts (c) and (d) if only 25% of botrowers ite Type A. 1. Gounidet an cconomy with a bank and two types of risky borrowers. Each type of borrower requires a loan for a project with an uncertain return. Borrower A's project has a return of either 10% or 056 , and esch retum is equally likely. Borroser B's project has a return of 1008 with probahility 0.1, otherwise the return is 0%. The batnk can make money by issuing loans to the borrowers but also has the option to purchise a Government bond with a guaranteed return of 2%. Bortowers will always repay the face value of their loans, but will only be able to repay the interest payments if it is less than the return on their project. (a) What are expected regarns of the two risky projects? (b) Suppose the bank can distinguish between the two types of borrowens. What is the ramallest interest rate the bank would charge each type of agent to make the loans worthwhile? (c) Now suppose that the bank cannot distinguish between the two types of bexrowers. If 75% of borrowers are type A, what is the lowest common interest rate it that the brank could charge for the loatis to be worthwhile? (d) Which types of borrosem yould agrie to barrow at the interet rate you calculated in part (e)? Would the bank higree to lend at this interest ratel (e) Repeat parts (c) and (d) if only 25% of botrowers ite Type A