A bank has a 5-year 10 million loan that pays annual, Ask an Expert

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A bank has a 5-year $10 million loan that pays annual payments of 7 percent and returns the principal at maturity. The bank can sell the loan with recourse at a price of $9 million and without recourse at a price of $8.9 million. If the probability of default (with no interest or principal being repaid) is 1.5 percent, should it sell the loan with or without recourse (assume risk neutrality)? Explain. [Note: the expected proceeds on the loan sale with recourse is the price times the probability that the loan will NOT default.]

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Financial Management, Finance

Category:- Financial Management
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