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An entrepreneur is quoted a loan rate of 12% at the local bank, while the bank pays depositors 6% per annum:

a) If in bankruptcy the entrepreneur will not pay back anything, but otherwise everything will be repaid, then what does the bank believe the probability of failure to be?

b) What is the quoted default premium?

c) Compute the expected default premium?

Basic Finance, Finance

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  • Reference No.:- M942924

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