Presume a bank is faced with two kinds of borrowers

Reference no: EM13685486

Presume a bank is faced with two kinds of borrowers- a high risk borrower that must be charged an interest rate of 9% and a low risk borrower that must be charged an interest of 4%. There is a 30% chance of getting a high risk borrower and a 70% chance of getting a low risk one. What is the expected rate that will be charged by a bank that cannot exactly distinguish among the two types but know the probabilities of each type? In this market for loans what would be the result?

Reference no: EM13685486

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