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Break-Even Analysis for a Risky Loan
A commercial bank is evaluating a loan application for $20,000 at an annual interest rate of 7%. To proceed, the bank's policy requires the loan to have at least a zero expected payoff. What is the minimum probability of repayment the bank must assess for this loan to meet its policy requirement? Express your answer as a percentage rounded to one decimal place and show the key steps in your calculation.
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- Loan Alpha offers a 15% interest rate, but the borrower has a profile that suggests an 85% probability of full repayment.
- Loan Beta offers a 10% interest rate, and this borrower's profile suggests a 95% probability of full repayment.
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Break-Even Analysis for a Risky Loan
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