What would be the loan rate

Reference no: EM13857839

A business applies for 1 million loan for a project and plans to repay the loan in one year. A loan officer estimates the payoff from the project will be 1.3 million with 85% probability and 0.7 million with 15% probability. If a loan defaults, on average, a bank can get 65% of the salvage value. If the bank requires 2% return on its loans and the risk free rate to be 3%, what would be the loan rate? If the salvage ratio is 85% and other parameters stay same, what would be the loan rate? How the ability to increase salvage ratio affects loan rate?

Reference no: EM13857839

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