1. Assume an entrepreneur has two projects to choose. Both require $100 investment. Assume the entrepreneur is risk-neutral. Safe project: returns $140 for sure Risky project: Returns $ 200 with 50% chance and $50 with 50% chance. If bank required collateral of $100, what would be entrepreneur’s return in each case? Which project will entrepreneur choose? If 50% of all borrowers are safe and 50% are risky, what interest rate bank will need to charge to break even if no collateral is required?
1. Assume an entrepreneur has two projects to choose. Both require $100 investment. Assume the entrepreneur is risk-neutral. Safe project: returns $140 for sure Risky project: Returns $ 200 with 50% chance and $50 with 50% chance. If bank required collateral of $100, what would be entrepreneur’s return in each case? Which project will entrepreneur choose? If 50% of all borrowers are safe and 50% are risky, what interest rate bank will need to charge to break even if no collateral is required?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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1. Assume an entrepreneur has two projects to choose. Both require $100 investment. Assume the entrepreneur is risk-neutral. Safe project: returns $140 for sure Risky project: Returns $ 200 with 50% chance and $50 with 50% chance.
If bank required collateral of $100, what would be entrepreneur’s return in each case? Which project will entrepreneur choose?
If 50% of all borrowers are safe and 50% are risky, what interest rate bank will need to charge to break even if no collateral is required?
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