Determine the effective rate of interest

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Suppose that John Doe wants to borrow $250,000 to buy a home but has a poor credit history. A bank seeking to earn a risk-free return on its loan requires the return equal to 3%. How would you structure the loan for John? Suppose that the loan is underwritten at 5%. However, what would determine the effective rate of interest to John? Given this, how would you tell others about why we had financial crisis in 2008?

Reference no: EM13847727

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