Compute the interest rate charged by the bank

Reference no: EM131919302

Problem

Consider a risk neutral bank that lends a total amount L = $1,000,000 to poor clients. The total cost of lending is C = $200,000, the total subsidy received from the government is S = $50,000, and the total income from other investments is I = $200,000. The expected fraction to be repaid is 0.80. Compute the interest rate charged by the bank when it is subsidized and when is not. Compute the subsidy dependence index. (Assume that the bank is an NGO and just wants to break even.) Briefly explain your answer.

Reference no: EM131919302

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