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8. Because of worries about adverse selection your bank wants to maintain a 4% spread (k- i) on corporate loans. Two borrowers: BigBucks (BB) Corp.

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8. Because of worries about adverse selection your bank wants to maintain a 4% spread (k- i) on corporate loans. Two borrowers: BigBucks (BB) Corp. and Our Best is not so Good (OBG) Corporation want to borrow funds. The probability of repayment by BB is p=0.95 and the probability of repayment for OBG is p=0.88. The risk-free rate (i) is 4%. a. How much collateral should BigBucks be required to put up for the loans? Answers= b. How much collateral should BigBucks be required to put up for the loans? Answers= 8. Because of worries about adverse selection your bank wants to maintain a 4% spread (k- i) on corporate loans. Two borrowers: BigBucks (BB) Corp. and Our Best is not so Good (OBG) Corporation want to borrow funds. The probability of repayment by BB is p=0.95 and the probability of repayment for OBG is p=0.88. The risk-free rate (i) is 4%. a. How much collateral should BigBucks be required to put up for the loans? Answers= b. How much collateral should BigBucks be required to put up for the loans? Answers=

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