A financial institution lends a company $500,000. A year later, the company declares bankruptcy and is unable to repay any amount of the loan. What is the lender's rate of return on this transaction?

Calculating Rate of Return in a Default Scenario

If a borrower completely fails to repay any portion of a $10,000 loan, the lender's rate of return on that loan is 0%.

Venture Capital Loan Default

When a borrower is unable to repay any portion of a loan, resulting in a complete loss of the original amount loaned, the lender's rate of return is precisely ____%.

A bank lends $10,000 to a small business. Match each potential repayment scenario for the business to the bank's resulting rate of return.

Explaining the Rate of Return in a Total Default

A lender provides a loan of $25,000. The borrower subsequently defaults completely, repaying $0. Arrange the steps below in the correct logical order to calculate the lender's rate of return.

An investor makes two separate loans: Loan A for $1,000 and Loan B for $500,000. Both borrowers default completely, repaying nothing. Which of the following statements correctly analyzes the outcome for the investor?

Two junior financial analysts are debating the financial outcome of a $20,000 loan where the borrower has defaulted completely, repaying nothing.

• Analyst A argues: 'The rate of return is 0%. We didn't make any money, so the return is zero.'
• Analyst B argues: 'The rate of return is -100%. A 0% return would mean we received our original $20,000 back. Since we lost the entire amount, the return is negative one hundred percent.'

Which analyst's reasoning is correct, and why?