Question

a lender charges an effective per annum interest rate of I) 15% to group of borrowers...

a lender charges an effective per annum interest rate of
I) 15% to group of borrowers with no default risk
ii)30% to a group of borrowers with very high default risk
determined the error involved in decomposing the rate for borrowers with high default risk into the sum of the rate for borrowers with no default risk and the rate that compensate for default risk,
I.e the error involved in ignoring the rs term

Need step by step solution please thanks

Homework Answers

Answer #1

Rate for borrowers with high interest rate is calculated with the given formula when effective interest rate is given:

R = [(1 + r ) ( 1 + s) -1] or = (r + s + r*s)

where R = Rate of interest with default risk = 30%

r = Rate of interest without default risk = 15%

s = Difference between default interest rate and without default interest rate ( Compensation for Default risk ) =

(30-15) = 15%

R = (1 + .15) (1 + .15) - 1 or (.15 + .15 + .15*.15)

= 32.25%

where r*s = (.15*.15) = 2.25%

Hence the error involve in the decomposition of interest rate with higher default of risk is 2.25% i.e.( 32.25% - 30%)

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
QUESTION 1 1. Brianna is trying to increase her chances of being promoted to vice president...
QUESTION 1 1. Brianna is trying to increase her chances of being promoted to vice president by working to build good work relationships with other managers outside her own department. Brianna's behavior should be viewed as dysfunctional politics. functional politics. coercive power. functional influence. 2 points QUESTION 2 1. The Gingerbread Factory has a separate unit that makes their chocolate crunch cookies and another unit that is completely responsible for all operations in producing their ginger snap cookies. The Gingerbread...
What are 4 key things you learned about the topic from reading their paper? How does...
What are 4 key things you learned about the topic from reading their paper? How does the topic relate to you and your current or past job? Critique the paper in terms of the organization and quality. Team 3 answer questions above. Part I In today’s world we see fear among people when dealing with sexual harassment. This leads to people not reporting sexual harassment. A misconception about sexual harassment is that it’s only about touching and forcing other people...
What tools could AA leaders have used to increase their awareness of internal and external issues?...
What tools could AA leaders have used to increase their awareness of internal and external issues? ???ALASKA AIRLINES: NAVIGATING CHANGE In the autumn of 2007, Alaska Airlines executives adjourned at the end of a long and stressful day in the midst of a multi-day strategic planning session. Most headed outside to relax, unwind and enjoy a bonfire on the shore of Semiahmoo Spit, outside the meeting venue in Blaine, a seaport town in northwest Washington state. Meanwhile, several members of...
During the trial, lawyers for the accused said that the men believed that the accounting decisions...
During the trial, lawyers for the accused said that the men believed that the accounting decisions they made were appropriate at the time, and that the accounting treatment was approved by Nortel’s auditors from Deloitte & Touche. Judge Marrocco accepted these arguments. Marrocco added he was “not satisfied beyond a reasonable doubt” that the trio (i.e., Dunn, Beatty, and Gollogly) had “deliberately misrepresented” financial results. Given the facts of the case, do you believe Judge Marrocco’s decision was justified? Explain....