Assume That You and Your Bank Agree That the Probability

question 20

Multiple Choice

Assume that you and your bank agree that the probability that you will default on a loan and repay nothing is 15% and that the appropriate interest rate is 6%. What interest rate would
You have to promise to pay in order to get a loan, assuming risk-neutrality? What is your cost
Of capital?

• A)loan rate = 24.7%; cost of capital = 6%
• B)loan rate= 24.7%; cost of capital = 24.7%
• C)loan rate = 10.5%; cost of capital = 6%
• D)loan rate = 10.5%; cost of capital = 10.5%

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Definitions:

Dominant Firms

Companies that have a major share of the market sales, influence, or both, enabling them to set prices within the industry.

Planned Economies

Economic systems where government agencies centrally plan and direct all major economic activities, assigning resources and determining outputs with the aim of achieving specific goals.

U.S. Firms

Companies or businesses that are registered, operate, or have their headquarters in the United States.

Bankrupt

A legal status of a person or entity that cannot repay debts to creditors and is thus subject to specific legal processes.