The economy required for banks to be willing to lend

Assignment Help Financial Management

Reference no: EM131933862

We have an economy with a proportion \alpha of "good" firms, and a proportion of 1-\alpha of "bad firms". All firms have the opportunity to invest in a project requiring an investment cost I=50, which gives a payoff X=100 if succesfull and zero if unsuccessfull. Good firms are always credit worthy and have a probability of success equal to 0,7, whereas bad firms only have a 0,4 probability of succeeding. All firms have to borrow the full investment cost from a perfectly competitive banking sector. Firms know their own type but banks are unable to distinquish between good and bad firms. All agents are risk neutral and indifferent with regard to the time allocation of consumption.

- What is the minimum proportion of good borrowers in the economy required for banks to be willing to lend?

- What is the interest rate that banks will charge at this proportion?

Now suppose that these is a business cycle upswing which doubles the proportion of good borrowers (the proportion of bad borrowers drops correspondingly), and that this change is expected to last for the duration of the investment project. Further assume that the project runs over 5 years. Everything else is unchanged.

- What is the annual interest rate charged by banks?

Reference no: EM131933862

Questions Cloud

The us has had a large deficit for decades : The us has had a large deficit for decades. This suggests weakening of the dollar with other things being equal.

Most likely to result in positive cash flow to creditors : Which of the following is most likely to result in a positive cash flow to creditors?

Present values increase with the discount rate : all else equal, an annuity will have a lower value if the discount rate is higher. all else equal, present values increase with the discount rate

What is standard deviation of the return on our portfolio : What is the expected return on our portfolio? What’s the standard deviation of the return on our portfolio?

The economy required for banks to be willing to lend : What is the minimum proportion of good borrowers in the economy required for banks to be willing to lend?

Operating breakeven analysis determines : Operating breakeven analysis determines:

What is the balance of your loan immediately : You are borrowing $25,000 at a nominal rate of 6% compounded monthly for 47 months. What is the balance of your loan immediately after your 31th payment?

Handle project valuation-current stock price per share : Dave Inc. recently hired you as a consultant to handle project valuation. What is Dave’s current stock price per share?

What is the company WACC : Bolster Foods book value balance sheet shows a total of $25 million long-term debt with a coupon rate of 8.5%. what is the company's WACC?

User Account

All Pages