interest rate of i = 0.03. What is the minimum interest rate that the lender will charge to borrow money in this economy
interest rate of i = 0.03. What is the minimum interest rate that the lender will charge to borrow money in this economy
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
![In this economy, there are 10,000
borrowers. Each person borrows $100 for a
1 year loan.
For the lender not to make a loss, the lender
must set an interest rate such that they earn
at least as much as their outside option of
not lending to people from all borrowers
that did not default in this economy. In this
case, the outside option is the risk-free
interest rate on a 1-year US Treasury
securtiy. The 1-year USTS pays annual
interest rate of i = 0.03. What is the
%3D
minimum interest rate that the lender will
charge to borrow money in this economy](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F259b224a-5a55-4616-a4d9-3f431e2d9964%2Fb54dd336-b580-4895-9b4b-521253773291%2Fer8r1jn_processed.jpeg&w=3840&q=75)
Transcribed Image Text:In this economy, there are 10,000
borrowers. Each person borrows $100 for a
1 year loan.
For the lender not to make a loss, the lender
must set an interest rate such that they earn
at least as much as their outside option of
not lending to people from all borrowers
that did not default in this economy. In this
case, the outside option is the risk-free
interest rate on a 1-year US Treasury
securtiy. The 1-year USTS pays annual
interest rate of i = 0.03. What is the
%3D
minimum interest rate that the lender will
charge to borrow money in this economy
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