Question

Risk R Us Investors has a success ratio of 15% with its venture funding. –Their owners require a rate of return of 25% for their portfolio of lending, –and the average length on each loan is 4 years. –If you were to apply to Risk R Us for a $200,000 loan, What is the annual percentage rate you would be required to pay for this loan?

Answer 1

Risk R Us Investors has a success ratio of 15%.This means one out of Fifteen times is a success. So the failure of 14 times needs to be covered from this one time.

If Risk R Us Investors makes 15 loans of $200,000 each means that 3,000,000 and required rate of return of 25% on portfolio.

F.v. = $3,000,000*(1.25)^4

= $7,324,219

$7,324,219 accumulated in 4 years

In order to achieve the required success, it will charge

={ ( $7,324,219/$3,000,000)^1/4 } - 1

=1.25 - 1

=0.25

= 25%

Annual percentage rate for the loan = 25%

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