9. Bank ABC offers six-year loans where the principal and interest are repaid at end of the term. Bank ABC wants to earn an annual continuous compounded interest rate of 8% on the loans for deferred consumption. For this loan, the probability that borrowers default is 2%. Unfortunately, for defaulted loans, Bank ABC is unable recover any of the repayment amount. Assuming there is no inflation, what is the rate charged by ABC to compensate for default risk? A)0.0015 B)0.0026 C)0.0034 D)0.0049 E)0.0055
9. Bank ABC offers six-year loans where the principal and interest are repaid at end of the term. Bank ABC wants to earn an annual continuous compounded interest rate of 8% on the loans for deferred consumption. For this loan, the probability that borrowers default is 2%. Unfortunately, for defaulted loans, Bank ABC is unable recover any of the repayment amount. Assuming there is no inflation, what is the rate charged by ABC to compensate for default risk? A)0.0015 B)0.0026 C)0.0034 D)0.0049 E)0.0055
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
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Transcribed Image Text:9. Bank ABC offers six-year loans where the principal and interest are repaid at end of
the term. Bank ABC wants to earn an annual continuous compounded interest rate of 8%
on the loans for deferred consumption. For this loan, the probability that borrowers
default is 2%. Unfortunately, for defaulted loans, Bank ABC is unable recover any of the
repayment amount. Assuming there is no inflation, what is the rate charged by ABC to
compensate for default risk?
A)0.0015
B)0.0026
C)0.0034
D)0.0049
E)0.0055
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