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You're working for a bank and considering a loan application from a borrower looking for $10,000 for one year. Based on your bank's risk models,
You're working for a bank and considering a loan application from a borrower looking for $10,000 for one year. Based on your bank's risk models, you believe there are three possible outcomes: a. There's a 0.65 chance they pay you back everything they owe you including interest. b. There's a 0.3 chance they pay you back half of what they owe you (including interest) plus the bank gets any collateral they put up. c. Or they pay you back nothing, but the bank still gets the collateral. If there is no collateral (this is an "unsecured" loan), what interest rate (where 0.01 = 1%, 1=100%, etc.) do you charge to ensure that your risk- adjusted rate of return is 5%
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