3. A bank will lend $2000 to a start-up company at 6% effective interest for one year. The bank estimates that there is a probability of .02 that the company will go out of business in the first year.

a) What is the expected value of the amount of money the bank will be repaid?

b) What is the expected rate of return on their loan?

c) Suppose the bank wishes its expected rate of return to be 6%, what rate of interest should the bank charge the start-up company?

d) The start-up company thinks the rate from part c) is too high, so it offers the bank some office equipment as collateral. If the company goes out of business the bank will get $500 from selling the office equipment instead of the loan payment. If the bank wishes its expected rate of return to be 6% what interest rate will they charge?