A bank makes a $50,000 loan to a company at a nominal interest rate of 12%. Based on the company's financial profile, the bank estimates there is a 10% probability that the company will default and be unable to repay any of the loan. What is the bank's expected rate of return on this loan?

Loan Profitability Decision

Calculating Maximum Acceptable Default Risk

A financial institution is evaluating two potential loans of the same principal amount. Loan X offers a high nominal interest rate but is extended to a borrower with a significant probability of non-repayment. Loan Y offers a lower nominal interest rate but is extended to a borrower with a very low probability of non-repayment. Which statement provides the most accurate evaluation for the lender when deciding between these two options?

Evaluating Lender Strategy: Interest Rates vs. Risk

For a lender, the expected rate of return on a loan is always equal to the nominal interest rate charged, as long as there is no possibility of the borrower repaying the loan ahead of schedule.

A commercial bank issues a one-year loan with a stated nominal interest rate of 15%. After assessing the borrower's financial situation, the bank calculates that its expected rate of return on this loan is only 5%. Which of the following statements best explains the 10-percentage-point difference between the nominal interest rate and the expected rate of return?

Determining Required Interest Rate with Default Risk

Calculating Implied Default Probability

A lender is considering four different one-year loans, each for the same principal amount. Based on the information provided for each loan, arrange them in the correct order from the highest expected rate of return to the lowest. Assume that in the event of a default, the lender recovers none of the principal or interest.