Question
At the beginning of each year from year 1 to year 3, Growth Bank originates one million three-year fixed-rate loans with initial amount lent of
At the beginning of each year from year 1 to year 3, Growth Bank originates one million three-year fixed-rate loans with initial amount lent of $240.18 per loan.The contractual terms of the loans require the borrowers to pay $100 at the end of the current year and following two years. These payments reflect a contractual interest rate of 12%.On average, Growth expects the borrowers to pay only 95% of the promised payments each year.1). Assume that Growth finances each vintage of assets entirely with equity.(This is not bank-like behavior, but it makes the calculations easier.) As Growth receives cash from a vintage of assets, the bank pays dividends on the equity, so that it does not retain any cash.Calculate the Bank's return on beginning-of-year assets at the ends of year 1 (when it has one one-year-old vintage of assets), year 2 (when it has one one-year-old vintage and one two-year-old vintages of assets), and year 3 (when it has one one-year-old vintage, one two-year-old, and one three-year old-vintages of assets).Explain why Growth's return on assets changes from year 1 to year 3.
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