Which Is More Expensive for a Bank: 1

question 26

Essay

Which is more expensive for a bank: 1. Making a loan to a customer that does not pay the loan back? or 2. Denying a loan to someone who would have paid the bank? Explain your answer.

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Definitions:

Risk-free Rate

The hypothetical yield of a risk-free investment, commonly signified by the interest rate on government bonds.

Cumulative Return

Cumulative return is the aggregate amount of money gained or lost by an investment over a set period, typically expressed as a percentage.

Initial Margin

The portion of the purchase price that an investor must deposit when buying securities on margin; serves as a down payment on the investment.

Maintenance Margin

The minimum amount of equity that must be maintained in a margin account after a purchase has been made, to keep the account open.