Pricing a 1-year loan with nonzero recoveryexample a, Ask an Expert

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Pricing a 1-year loan with nonzero recovery:

Example: A borrower has a 5% chance of default on a $100 loan; If default occurs, the bank gets $60 back in principal and no interest; The bank sets the rate on the loan expecting 6% (3% inflation + 3% real) What is the interest rate the bank charges this borrower?

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Category:- Financial Management
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