Posted: March 6th, 2014
20 points) A bank decides to offer loans in a village. Each borrower would like a loan of $5.Assume…
bank decides to offer loans in a village. Each borrower would like a loan of $5.Assume the bank has access to funds at a national interest rate of 10%. In the village, a fraction p are credit-worthy and a fraction (1 – p) are not credit-worthy. The bank is unable to distinguish between the two types of borrowers. (7) Now suppose the creditworthy people earn each from investing the $5 loan. At some point, when p gets sufficiently small, they will be unwilling to take a loan at al”>
20 points) A bank decides to offer loans in a village. Each borrower would like a loan of $5.Assume the bank has access to funds at a national interest rate of 10%. In the village, a fraction p are credit-worthy and a fraction (1 – p) are not credit-worthy. The bank is unable to distinguish between the two types of borrowers. (7) Now suppose the creditworthy people earn $10 each from investing the $5 loan. At some point, when p gets sufficiently small, they will be unwilling to take a loan at all. Determine what this value of p is. Question Tags :Finance Corporate Finance Capital Budgeting University
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