Exercise

Exercise 5. Bank earnings interest rate - 1

So far, we've been assuming that we make no money when people pay their loans and we lose a lot of money when people default on their loans. Assume we give out loans for $180,000. How much money do we need to make when people pay their loans so that our net loss is $0?

In other words, what interest rate do we need to charge in order to not lose money?

Instructions

100 XP
  • If the amount of money lost or gained equals 0, the probability of default times the total loss per default equals the amount earned per probability of the loan being paid.
  • Divide the total amount needed per loan by the loan amount to determine the interest rate.