With no interest or principal being repaid

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Reference no: EM131047675

A bank has a 4-year $30 million loan that pays annual payments of 9.5 percent and returns the principal at maturity. The bank can sell the loan with recourse at a price of $28.7 million and without recourse at a price of $26.8 million. If the probability of default (with no interest or principal being repaid) is 0.75 percent, should it sell the loan with or without recourse (assume risk neutrality)? Explain. [Note: the expected proceeds on the loan sale with recourse is the price times the probability that the loan will NOT default.]

Reference no: EM131047675

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