A company will earn net profits of $100,000 if the economy booms (probability of 80%) and net profits of $60,000 if the economy enters a recession (probability of 20%). The company wants to take out a loan for $74,000 to finance its operations.

Treasuries of the same maturity offer an interest rate of 6%. Assume risk neutrality.

A)What payoff would the bank receive if it invested $74,000 in Treasuries?

B)What payout should the bank be looking for during the boom (in $)?

C)What interest rate should the bank quote?