What is the probability of default in delinquia

Assignment Help Econometrics

Reference no: EM131204753

(Default) The Republic of Delinquia has a nondisaster output level of $100 each year. With 10% probability each year, output falls to a disaster level of $80, and the country will feel so much pain that it will default and pay neither principal nor interest on its debts. The country decides to borrow $20 at the start of the year, and keep the money under the mattress. It will default and keep the money in the event that output is low, but this will entail sacrificing $4 in punishment costs. Otherwise, it pays back principal and interest due. Lenders are competitive and understand these risks fully.

a. What is the probability of default in Delinquia?

b. The interest rate on safe loans is 8% per annum, so a safe loan has to pay off 1.08 times $20. What is the lending rate charged by competitive lenders on the risky loan to Delinquia?

c. What does Delinquia consume in disaster years? In non disaster years?

d. Repeat part (c) for the case where Delinquia cannot borrow. Is Delinquia better off with or without borrowing?

Reference no: EM131204753

Questions Cloud

Calculate the sharpe ratio for these trades : Can the trader's predictable profits be explained by trading frictions? By risk aversion?

Argument that certain kinds of cultures : Develop the argument that certain kinds of cultures, political and economic systems are, by their nature, resistant to economic development through international trade.

Identify a problem situation (hr problem) in an organisation : Identify a problem situation (HR problem) in an organisation they have access to-preferably an organisation where at least one group member works or has worked recently.

Development of selected organization : How does the marketing mix affect the development of your selected organization's marketing strategy and tactics? What role did technology play, if any?

What is the probability of default in delinquia : The interest rate on safe loans is 8% per annum, so a safe loan has to pay off 1.08 times $20. What is the lending rate charged by competitive lenders on the risky loan to Delinquia?

Human resource development positions : Discuss why those in the human resource development positions are in a prime position to facilitate the change process. How can they develop employee trust in the change process?

Web-based statistics class to a regular lecture : What kind of survey (mail, telephone, interview, web, direct observation) would you recommend for each of the following purposes, and why? What problems might be encountered? To estimate the proportion of students at your university who would prefe..

What types of studies are these theories normally employed : What geographic theories were used to track Osama bin Laden to his possible hiding place? In what types of studies are these theories normally employed?

Do you see any drawbacks to government intervention : Why do you think the private sector failed to meet this need? Do you see any drawbacks to government intervention in this area?

User Account

All Pages