homework4 - Econ 451: Homework 4 (Due March 25) 1. Consider...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Econ 451: Homework 4 (Due March 25) 1. Consider an overlapping generations model in which the population growth rate is 4% and money with complete safety or to lend to a borrower who may never repay the loan. The chance of such a default is 20% . (b) Suppose that the lenders are risk neutral. What will be the expected rate of return on the loan? What interest rate would a lender charge a borrower for the risky loan? (c) Suppose that the lenders are risk averse. What can you say about the level of the loan rate comparing with that of (b)? Explain. 2. Suppose there is a risky project that each dollar invested pays a high return $6 with prob- ability 20% , a medium return of $2 with probability 50% , and incurs a loss of $3 with probability 30% . A risk-free asset pays gross real rate of return of 1 : 05 : (a) What is the expected gross rate of return of the risky project? (b) What is the risk premium of the risky project?
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/06/2010 for the course ECON 0 at Penn State.

Page1 / 2

homework4 - Econ 451: Homework 4 (Due March 25) 1. Consider...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online