What is expected interest rate that will be charged by bank

Assignment Help Financial Management
Reference no: EM131354282

Suppose a bank is faced with two types of borrowers - a high risk borrower that should be charged an interest rate of 9% and a low risk borrower that should be charged an interest rate of 4%. There is a 30% chance of getting a high risk borrower and a 70% chance of getting a low risk one. What is the expected interest rate that will be charged by a bank that cannot exactly distinguish between the two types but knows the probabilities of each type. In this market for loans what would be the result.

Reference no: EM131354282

Questions Cloud

What is the price range of houses they should consider : The Johnsons have accumulated a nest egg of $27,000 that they intend to use as a down payment toward the purchase of a new house. Because their present gross income has placed them in a relatively high tax bracket, they have decided to invest a minim..
Calculate the loan apr and rear assuming : Montana Allied Products (MAP) must borrow $1.7 million to finance its working capital requirements. The bank has offered a 45-day simple interest loan with a quoted interest rate of 8 percent. Calculate the loan’s APR and rEAR assuming there is (a) n..
Determine the approximate cost of the new reactor : 10 years ago, when the relevant cost index was 125, a nuclear centrifuge cost $40,000. The centrifuge had a capacity of separating 1500 gallons of ionized solution per hour. Today, it is desire to build a centrifuge with capacity of 4500 gallons per ..
The profitability index method of capital budgeting : If (1) the compound rate has been increased and (2) the compounding period has been decreased, what impact would this have on the future value of your deposit? The decision criterion in the profitability index method of capital budgeting is to accept..
What is expected interest rate that will be charged by bank : Suppose a bank is faced with two types of borrowers - a high risk borrower that should be charged an interest rate of 9% and a low risk borrower that should be charged an interest rate of 4%. What is the expected interest rate that will be charged by..
Eurobond with par value-what is the cost of debt : A firm issues a 10-year Eurobond with a par value of JPY 10 billion. Annual interest payments of 2.2% are calculated based on par value. If the issue price is 101 percent, what is the cost of debt?
Why might investor prefer convertible bond over regular bond : How is the profitability index calculated and how can it be used to choose between projects when funds are limited? Why might an investor prefer a convertible bond over a regular bond? The IF for the future value of an annuity is 4.5% at 8% for 4 yea..
What are two other ways swiss air might hedge : On January 2d, 2017, Boeing expects to send 5 787s from its plant in Seattle, WA to Swiss Air, which it will sell on 270-day terms at $125 million each. Thus Boeing will receive payment from Swiss Air on September 27th, 2017. What are two other ways ..

Reviews

Write a Review

Financial Management Questions & Answers

  What other factors might be important in your analysis

What is the probability that this project will be acceptable to BBW, if the goal is to maximize shareholder wealth? What other factors might be important in your analysis? Be specific.

  What is the bond current market price

Madsen Motors's bonds have 10 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 12%; and the yield to maturity is 8%. What is the bond's current market price?

  European put with the same strike and same expiration date

The current spot price of a stock is $34, the expected rate of return of the stock is 8%, and the volatility of the stock is 20%. The risk-free rate is 3% for all times. Compute the price of a European call option on the stock with strike price $35 e..

  Stock price of fairfax pizza expected to be in one year

Fairfax Pizza stock is currently priced at 87.48 dollars per share and is expected to pay its next dividend, which is expected to be 2.34 dollars, in 1 year. The stock has a beta of 0.63. The market has an expected return of 16.39 percent, the risk-f..

  Compute the book value-liquidation value-replacement value

We know the following about Radice. Total assets are $120m, D is $40m, E is $60m, preferred stock of $20m, cash is $10m and the # of shares is 1m. We estimate that the market value of equity is 3 times the book value of it. Finally, a fire sale of th..

  Wisest path is to sell some stock to outside investors

Another three months have passed. You are now ready to expand to your sister city and you need more capital. You decide the wisest path is to sell some stock to outside investors, but you will maintain control over your company by holding onto the ma..

  Compute income taxes owed for a firm

Compute income taxes owed for a firm with the following data:

  Dividend on the presplit stock

The company with the common equity accounts shown here has declared a 4-for-one stock split when the market value of its stock is $33 per share. The firm’s 80-cent per share cash dividend on the new (post split) shares represents an increase of 25 pe..

  Prepare a horizontal common size analysis for the net sales

Using 2008 as the base, prepare a horizontal common-size analysis for the Net sales and Assets.- Comment on each of the horizontal common-size in (a).

  What is the average accounting return

Colin's Haberdashery Products is considering a project that would have an initial cost of $285,000 and a 4-year life. The project’s assets will be depreciated using straight-line depreciation to a zero book value over the life of the project. What is..

  Determine most likely rate for double cancellable swap

Determine the most likely rate for this ‘double-cancellable' swap. - Bank A wants to pay fixed on a {10nc1 Berm ann} swap to Bank B.

  Stock valuation models dependent upon expected dividends

Why are stock valuation models dependent upon expected dividends, future dividend growth, and an appropriate discount rate? Please be sure to review how we value any financial asset which will help dissect this answer.

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