Explore BrainMass
Share

Interest rate and probability

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Suppose a bank is faced with two types of borrowers (a high risk borrower that should be charged an interest rate of 9% and a low risk borrower that should be charged an interest rate of 4%). There is a 30% chance of getting a high risk borrower and a 70% chance of getting a low risk one. What is the expected interest rate that will be charged by a bank that cannot exactly distinguish between the two types but knows the probabilities of each type. In this market for loans what would be the result?

© BrainMass Inc. brainmass.com October 24, 2018, 11:43 pm ad1c9bdddf
https://brainmass.com/economics/cost-benefit-analysis/interest-rate-and-probability-203121

Solution Preview

You need to multiply the interest rate of the high risk borrower with the percentage ...

Solution Summary

This solution is comprised of a detailed explanation to answer what is the expected interest rate that will be charged by a bank that cannot exactly distinguish between the two types but knows the probabilities of each type.

$2.19
See Also This Related BrainMass Solution

Probability Distribution of Forecasts and Forecasting

Please provide answers to these questions involving: Probability Distribution of Forecasts and Forecasting with a Forward Rate (attached).

Please provide some details explaining answers so that I can study from them . Thanks.

View Full Posting Details