Invest in safe projects that offer expected rate of return

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Reference no: EM131868191

Assume that the probability that the Patriots will win the Superbowl is 55%. A souvenir shop outside the stadium will earn net profits of $1.5 million if the Patriots win and $1.0 million it they lose. You are the loan officer of the bank to whom the shop applied for a loan. You can assume that your bank is risk neutral and that the bank can invest in safe projects that offer an expected rate of return of 10%. [Hint: this question requires that you compute the amount that you would demand for repayment.]

(a) What interest rate would you quote if the owner asked you for a loan for $900,000 today?

(b) What interest rate would you quote if the owner asked you for a loan for $1,000,000 today?

Reference no: EM131868191

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