How much profit can the lending institution expect to earn

Assignment Help Microeconomics
Reference no: EM13902773

UNIVERSAL SAVINGS & LOAN has $1000 to lend.

Risk-free loans will be paid back in full next yearwith 4% interest. Risky loans have a 20% chance of defaulting (paying back nothing) and an 80% chance of paying back in full with 30% interest.

a. How much profit can the lending institution expect to earn? Show that the expected profits are the same whether the lending institution makes risky or risk- free loans.

b. Now suppose that the lending institution knows that the government will "bail out" UNIVERSAL if there is a default (paying back the original $1000). What type of loans will the lending institution choose to make? What is the expected cost to the government?

c. Suppose that the lending institution doesn't know for sure that there will be a bail out, but one will occur with probability P. For what values of P will the lending institution make risky loans?

Reference no: EM13902773

Questions Cloud

Paradigm for soil preservation : The onus is on the world community to establish a paradigm for soil preservation as the entire globe's soil solvency is jeopardized by the practices that are engaged in with industrialized cultivation of the land using wide scale pesticides and ot..
Employs the principles of vision-values and mission : Strategic Thinking. This type of thinking employs the principles of Vision, Values and Mission. Develop a classroom lecture that details each of these principles, and notes how each affects a person’s leadership style.
Integrating with the use of enterprise resource planning : What is an example of how integrating with the use of enterprise resource planning (ERP) can help an organization, from research or your own personal experience?
Prepare journal entries to record the preceding transactions : Archer Co. allows select customers to make purchases on credit. Its other customers can use either of two credit cards: Commerce Bank or Aztec.
How much profit can the lending institution expect to earn : Suppose that the lending institution doesn't know for sure that there will be a bail out, but one will occur with probability P. For what values of P will the lending institution make risky loans?
Difference between semantic-recommendation search engines : Describe the five different types of Information Retrieval and give an example of each. What are four ways that search technology impacts business and give an example of each? What are three different methods that search engines use in ranking the Se..
What is the p-value for the test : Based on the sample data, is it possible that the population mean delivery times for all three couriers might be the same? Using a level of significance of your choice, perform an appropriate ANOVA statistical analysis and attach any supporting co..
Key points of the author main argument : Start by identifying the author's central thesis and then attempt to outline the key points of the author's main argument. Roughly ¾ of your essay should focus on summarizing the content of the book, whereas ¼ of it should be designated for presen..
What process provides objective information and decision : What process provides objective information? What type of research is NOT used to make an objective decision? What process includes gaining consensus and forming a project team recommendation? What process provides subjective information? What is the..

Reviews

Write a Review

 

Microeconomics Questions & Answers

  Explain second-degree price discrimination

Second-degree price discrimination is also known as block rate setting. captures all consumer surplus. sets a different price for each customer.

  Find the budget constraint if the student can save at

consider a group of college students who all receive a 1000 money endowment from their parents at the start of both the

  200 million euros due one year from now,

If your company has a payment of 200 million euros due one year from now, how would you hedge the foreign exchange risk in this payment with 125,000-euro futures contracts?

  Suppose that demand for bagels in the local store is given

Suppose that demand for bagels in the local store is given by equation Q^d 300-100P. In this equation, P denotes the price of one bagel in dollars

  Two small open economies-fixed and flex

Two small open economies, Fixed and Flex, can be described by the Mundell%u2013Fleming model. The countries are otherwise identical except that Fixed maintains a fixed exchange rate, while Flex maintains a flexible exchange-rate regime.

  What is the value of the adjustment factor

In trip calculation, it is observed that a Wal-Mart store driver successfully made a total of 104 trips in a given period of time. During field calculation, it is shown that the calculated number of trips is actually 128. What is the value of the ..

  Explain the relationship between the magpie and the eagle

Explain the relationship between the Magpie and the Eagle and explain what would be the effect of a 10% increase in the income of the target market have on the demand for the Magpie

  What is the path of market exchange rate likely to be over

A country has had a steady value for its floating exchange rate (stated inversely as the domestic currency price of foreign currency) for a number of years. The country now tightens up on (reduces) its money supply dramatically.

  The market for social games on facebook is perfectly

the market for social games on facebook is perfectly competitive. the demand curve for games published is given by

  On their own firms have little incentive to invest in

on their own firms have little incentive to invest in pollution abating technologies such assmokestack filters a

  Find two points on the curve that have a common tangent line

Find two points on the curve that have a common tangent line. Bonus: Prove that there are only two such points. I have a midterm tomorrow and I cannot solve this. Can someone solve and explain how/why they did what they did?

  What are the different types of unemployment

How do you measure Economic Activity? What are the two ways of measuring GDP and what are the different types of Unemployment?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd