You are the owner of a finance company that extends one-year loans for people to...
90.2K
Verified Solution
Link Copied!
Question
Accounting
You are the owner of a finance company that extends oneyear loans for people to buy appliances and other household goods. A young MBA that you just hired suggests that since the default risk of your loans is all diversifiable ie the correlation of the return on the loans with the market is zero you should charge your customers the riskfree rate. a Assuming the default risk is completely diversifiable, does the CAPM tell you to set the interest rate on your loans equal to the riskfree rate? b Assume the riskfree rate is and that the probability of default is for the next year. In addition, assume that if a borrower defaults, all the principal but no interest is paid back. What rate should your finance company charge for loans over the next year?
You are the owner of a finance company that extends oneyear loans for people to buy appliances and other household goods. A young MBA that you just hired suggests that since the default risk of your loans is all diversifiable ie the correlation of the return on the loans with the market is zero you should charge your customers the riskfree rate. a Assuming the default risk is completely diversifiable, does the CAPM tell you to set the interest rate on your loans equal to the riskfree rate? b Assume the riskfree rate is and that the probability of default is for the next year. In addition, assume that if a borrower defaults, all the principal but no interest is paid back. What rate should your finance company charge for loans over the next year?
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
- Unlimited Question Access with detailed Answers
- Zin AI - 3 Million Words
- 10 Dall-E 3 Images
- 20 Plot Generations
- Conversation with Dialogue Memory
- No Ads, Ever!
- Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Other questions asked by students
StudyZin's Question Purchase
1 Answer
$0.99
(Save $1 )
One time Pay
- No Ads
- Answer to 1 Question
- Get free Zin AI - 50 Thousand Words per Month
Best
Unlimited
$4.99*
(Save $5 )
Billed Monthly
- No Ads
- Answers to Unlimited Questions
- Get free Zin AI - 3 Million Words per Month
*First month only
Free
$0
- Get this answer for free!
- Sign up now to unlock the answer instantly
You can see the logs in the Dashboard.