In a Risk-Neutral World, the Realized Default Premium to Be

question 10

Multiple Choice

In a risk-neutral world, the realized default premium to be expected on a loan

• A)will be greater than the expected rate of return.
• B)will be equal to zero.
• C)will equal the promised return minus the time premium.
• D)Both B and C are true.

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Definitions:

Excise Taxes

Taxes applied to the purchase of specific goods or activities, sometimes used to discourage consumption of certain items.

Deadweight Loss

A loss of economic efficiency that can occur when the equilibrium for a good or service is not achieved or is not achievable.

Revenue

The total amount of money received by a company for goods sold or services provided during a certain time period.

Deadweight Loss

The loss of economic efficiency when the equilibrium in a market is not achieved or is unachievable, leading to a potential loss of social welfare.