Analyzing a Loan Default

A financial institution lends $10,000 to a borrower with a stated annual interest rate of 5%. At the end of the year, the borrower defaults on a portion of the loan and only repays a total of $9,000. What is the actual rate of return for the financial institution on this loan?

A financial institution issues a loan with a specific, agreed-upon interest rate. If the borrower only repays part of the total amount due, the institution's actual rate of return on the investment will be lower than the initially agreed-upon interest rate, but the interest rate itself remains unchanged.

Lender's Profitability and Borrower Default

Evaluating Loan Investment Decisions Under Default Risk

Match each loan repayment scenario to the resulting relationship between the lender's actual rate of return and the loan's stated interest rate.

For a lender's actual rate of return on a loan to be exactly equal to the stated interest rate, the borrower must repay the principal plus all of the agreed-upon interest, meaning there is zero borrower ______.

A bank issues three separate loans of $50,000, each with a stated annual interest rate of 6%. At the end of the year, the repayment outcomes for the three loans are different. Arrange the following loan scenarios in order from the one yielding the highest actual rate of return for the bank to the one yielding the lowest.

A bank provides a $100,000 loan to a company with a stated annual interest rate of 8%. At the end of the year, the company experiences financial trouble and only repays a total of $102,000. Which of the following statements accurately analyzes the outcome for the bank?

A commercial bank lends a business $200,000 with a stated annual interest rate of 7%. Due to the risk of non-payment, the bank wants to determine the minimum amount it must recover from the business at the end of the year to avoid an actual financial loss on the principal amount loaned. What is this minimum recovery amount?