Discuss Which Is More Expensive for a Bank: Extending Credit

question 37

Essay

Discuss which is more expensive for a bank: Extending credit to a customer who ultimately defaults, or denying credit to a customer who would have paid the bank back.

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Definitions:

Payback Period

The length of time required to recover the cost of an investment, calculated by dividing the initial investment by the annual cash inflow.

Discount Rate

The interest rate used to discount future cash flows to their present value, reflecting the time value of money and risk.

Initial Investment

The initial outlay of money required to start a project, purchase an asset, or invest in a business venture.

Useful Life

The estimated period over which an asset is expected to be usable for the purpose it was acquired.