ECON 4784
Prof. Francisca Antman
经济学作业代做 Suppose that a moneylender operates in a competitive credit environment where the opportunity cost of funds is 10%. Also assume that
Exercise 10—Interest Rates--SOLUTIONS 经济学作业代做
Suppose that a moneylender operates in a competitive credit environment where the opportunity cost of funds is 10%. Also assume that only 50% of loans are paid back with interest and the
remainder of the borrowers default.
a. Find the interest rate the money-lender charges his clients.
Zero profit condition states: p(1+i)L – (1+r)L = 0, where only fraction p loans will be paid back (probability of repayment=p).
This implies: i = (1+r)/p – 1.
If p=1/2 and r = .10, i has to be 120% to cover the risk of default! (2.2-1 = 1.2) 经济学作业代做
b.If a rural borrower took out a $100 loan for one year, how much would he have to pay back at the end of the year, including interest and principal? (You may assume interest compounds annually.)
100*(1+1.2) = $220
c.What would the interest rate be if all loans were paid back with certainty?
i = r which in this case is 10% 经济学作业代做
d.What would happen to the gap between the interest rate and the lender’s opportunity costs if there were a rise in the probability of repayment? What if there were a drop in the probability of repayment?
If there were a rise in probability of repayment, i would fall closer to r, so the gap (i-r) would fall.
If there were a drop in probability of repayment, i would rise further to be further away from r, so the gap (i-r) would rise.经济学作业代做
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