Consider the case where the borrower has some wealth of his own (k) that he can
ID: 1119771 • Letter: C
Question
Consider the case where the borrower has some wealth of his own (k) that he can invest in the project. His expected returns schedule would be: What does the last term in the above equation stand for? Select one: a. It is equal to what the borrower earns from the project. O b. It is equal to what the borrower expects to get but doesn't get at the end of the period. O c. It is equal to what the borrower now doesn't need to pay to the lender (because of his own wealth). O d. It is equal to what the borrower would have received at the end of the period if he had not invested his wealth in a risky project. Consider the case of a monopolistic lender interacting with a borrower who has some wealth. The higher the own wealth invested in the project, the Choose the level of risk that the borrower will set for each given interest factor. At the same time, as the own wealth invested by the borrower increases, the lender will charge a Choose s interest factor. As a result, the overall effect of an increase in own wealth (k) on the level of risk (f) is Choose...Explanation / Answer
Option (d) is the right answer where 'rho' symbol denotes the risk free rate he can get when he invest the money he havein the government treasury bills.
1. lower the interest rate
2. low rate
3. high