Consider the case where the borrower has some wealth of his own (k) that he can
ID: 1119999 • 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 O a. It is equal to what the borrower earns from the project. O b. It is equal to what the borrower now doesn't need to pay to the lender (because of his own wealth). C. It is equal to what the borrower expects to get but doesn't get at the end of the period 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.Explanation / Answer
1 the correct option is (d). It is the interest foregone.
2 the correct option is a, d.
The interest rate is pegged at MC of making the credit available in the perfect competitive setup.