• R = gross return of the project to the firm
• r = interest rate charged by the bank
• B = amount borrowed
• C = amount of collateral

Assume that the lower bound (i.e., the lowest possible value) for all of these variables is zero, and none of these variables has an upper bound (i.e., a highest possible value).

(a) Give the equation for the return to the bank on a loan, which is a function of the above four variables. What is the lower bound of the return to the bank, if a lower bound exists? What is the upper bound of the return to the bank, if an upper bound exists?

(b) Give the equation for the net return to the borrower, which is a function of the above four variables. What is the lower bound of the net return to the borrower, if a lower bound exists? What is the upper bound of the net return to the borrower, if an upper bound exists?