The assumptions about your repayment abilities are accurate

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Reference no: EM131178725

You need to borrow a loan of $20,000 for one year. Your bank thinks there is a 96% probablility that you will repay the loan and the interest, a 3% chance that you will only be able to pay $15,000, and a 1% chance that you won't be able to pay anything back. The risk-free rate is 3%.

With risk neutrality, what interest rate is needed for the bank to earn the risk-free rate, if the assumptions about your repayment abilities are accurate?

With the same data but with aversion to risk and a risk premium of 3% per annually, which interest rate is needed for the bank to earn 4% annually, if the assumptions about your repayment abilities are accurate?

Reference no: EM131178725

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