How is the interest rate charged on the loan

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WCM Corp would like to borrow $1 million for one year. There is a 90% chance that the loan will be repaid in full and a 10% chance that the ?rm will be bankrupt at the end of the year. In the event that the ?rm is bankrupt, its assets can be sold for $0.6 mi. However, the legal costs of seizing WCM assets will cost the bank $0.1 mi. How much will a bank charge for the loan if it prices loans to companies like WCM to earn. on average, 10%? How is the interest rate charged on the loan affected by the potential bankruptcy costs?

Reference no: EM133120884

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