What is the expected rate of return on their loan

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Reference no: EM132023650

A bank will lend $2000 to a start-up company at 7% effective interest for one year. The bank estimates that there is a probability of .04 that the company will go out of business in the first year.

a) What is the expected value of the amount of money the bank will be repaid?

b) What is the expected rate of return on their loan?

c) Suppose the bank wishes its expected rate of return to be 7%, what rate of interest should the bank charge the start-up company?

Reference no: EM132023650

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