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  3. a customer has apprached a bank for $20,000 one-ye

A customer has apprached a bank for $20,000 one-year loan at a 18% interest rate. If...

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General Management

A customer has apprached a bank for $20,000 one-year loan at a18% interest rate. If the bank does not approve this loanapplication the $20,000 will be invested in bonds that earn a 5%annual return. The bank will charge the customer an up-front $200legal fee if the loan is granted. The bank believes that there a p%chance that this customer will default on the loan, assuming thatthe loan is approved. If the customer defaults on the loan tha banlwill lose $10,000. Should the bank make the loan?..

If the objective is to maximize the bank's profit, whar is thesmallest value of p for the which the bank should not grant theloan? (Obviously as p decreases, the profitability of the loanincreases.)

Explain please

Answer & Explanation Solved by verified expert
3.8 Ratings (484 Votes)
Considering the fact that the payable upfront fee is payable bythe customer and taking the analysis formatThe analysis is    See Answer
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