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.

Take Hint (-30 XP)