Q3 Moral hazard in credit markets 12 Points A competitive lender makes loans to a pool of borrowers that are identical. After borrowers have received their loans they choose one of two investment projects. Project G pays the borrower a rate of return of rg with probability Pg. With probability 1 - Pg, Project G pays a rate of return of -1, the borrower defaults on the loan, and the lender receives nothing. Project B pays the borrower a rate of return of rs with probability pb. And with probability 1 po, Project B pays a rate of return of -1, the borrower defaults on the loan, and the lender receives nothing. We assume as usual that rg pb, and pg(1+rg) > pb(1+rb). Suppose rg = 0.10, rv = 0.12, Pg = 0.99, pb = 0.4, rd = 0.02, L = 1. The lender can't distinguish between borrower types and so it charges all borrowers the same interest rate rl. The lender lends an amount L and pays interest rp on funds acquired from depositors. Round your answer to at least three decimal places. Q3.1 3 Points Write down an expression for the profit that a borrower expects from Project G assuming that no collateral is required. Upload an image of your answer as a pdf file. Please select file(s) Select file(s) Save Answer Q3 Moral hazard in credit markets 12 Points A competitive lender makes loans to a pool of borrowers that are identical. After borrowers have received their loans they choose one of two investment projects. Project G pays the borrower a rate of return of rg with probability Pg. With probability 1 - Pg, Project G pays a rate of return of -1, the borrower defaults on the loan, and the lender receives nothing. Project B pays the borrower a rate of return of rs with probability pb. And with probability 1 po, Project B pays a rate of return of -1, the borrower defaults on the loan, and the lender receives nothing. We assume as usual that rg pb, and pg(1+rg) > pb(1+rb). Suppose rg = 0.10, rv = 0.12, Pg = 0.99, pb = 0.4, rd = 0.02, L = 1. The lender can't distinguish between borrower types and so it charges all borrowers the same interest rate rl. The lender lends an amount L and pays interest rp on funds acquired from depositors. Round your answer to at least three decimal places. Q3.1 3 Points Write down an expression for the profit that a borrower expects from Project G assuming that no collateral is required. Upload an image of your answer as a pdf file. Please select file(s) Select file(s) Save