LOAN COMMITMENTS. Chara&McAvoy Inc., can choose one of two projects: safe and risky. The safe project yields $139 with probability .95 and zero with probability .05, whereas the risky project yields $160 with probability .60 and zero with probability .40. Each project requires an investment of $100, which Chara&McAvoy must borrow. The bank can make only an unsecured loan, and cannot observe the firms choice of project. Everyone is risk neutral, and the risk-free rate is zero.

a. Do lenders willingly finance a risky project?

b. Find the maximum interest rate the bank can charge and still have Chara&McAvoy choose the safe project.

c. Find the rate at which the bank breaks even (earns no more than the cost of funds) on a single loan to finance an efficient project. Will the bank agree to make just a single loan to Chara&McAvoy?