Assume that a subprime mortgage involves a loan of $1,000 and is to be paid...
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Assume that a subprime mortgage involves a loan of $1,000 and is to be paid back in full with 30 percent interest after one year. a. Sometimes borrowers will not be able to pay off the entire mortgage or may default entirely. Calculate the final amount of money an investor earns under the payback rates shown in the table below. (Note that a rate of 130 percent means that the whole loan is paid off, plus the additional 30 percent of interest.) Instructions: Enter your answers as whole numbers. Amount paid Probability Final value ($) Expected value ($) (% 130 0.6 110 0.1 100 0.1 50 0.1 0 0.1 Total expected value b. Assume investors are unwilling to invest in these loans unless the expected rate of return is 10 percent. Calculate the expected rate of return for this loan by adding up all of the products of the final value and the probability that the value will occur. Instructions: Enter your answer as a whole number. Rate of return = percent. Will investors want to invest in this loan? Yes, because the rate of return is more than 10 percent. Yes, because the rate of return is less than 10 percent. No, because the rate of return is more than 10 percent. No, because the rate of return is less than 10 percent
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