Suppose that there are 100 individuals, each with 10,000 in savings that they would like to lend, but only if there is little to no chance that they will lose their investment. Suppose there are also 100 different people who want 10,000 loans.

a) Assuming an expected default rate of 10% and an interest rate on loans of 20%, use this example to show how sharing risk through financial intermediation can increase the efficiency of financial markets.

b) Assuming the default rate using financial intermediation is exactly 10%, what is the interest rate at which the return is 0%?

c) Supposing there are 10 persons who wants to take out a 100,000 loan. Use this example to explain how pooling small deposits through financial intermediation can increase the efficiency of financial markets.