This question is identical to the "Adverse Selection in the Debt Market" problem from class.

There are two different types of companies in the market:

Good companies earning a rate of return of 6% for sure.

Bad companies earning a rate of return of either 0% or 16% with equal chance.

Furthermore, you know that there are just as many Good Companies as Bad Companies, however, you have no way to identify which type an individual company is. Please calculate to two decimals. Note that the % sign should not be included in your answer, because it is already written in the text.

If a bank is charging 5% for loans, would both types of companies apply for a loan? Answer Yes/No:

Is there a chance that some of the companies are unable to repay the loan plus interests? Answer Yes/No:

As a result the expected return for the bank would be %.

Repeat for the case of 6% interest rate on loans. The expected return for the bank would then be %.

Repeat for the case of 7% interest rate on loans. The expected return for the bank would then be %.

Repeat for the case of 8% interest rate on loans. The expected return for the bank would then be %.

Repeat for the case of 9% interest rate on loans. Would any company apply? Answer (Yes/No):