I want to borrow $20,500 from you today so I can hire a landscaping company to...
I want to borrow $20,500 from you today so I can hire a landscaping company to redesign my property. I promise to repay principal plus interest one year from now. There is a 68% probability that I will repay in full. There is a 22% probability that I will only be able to repay $14,000 and a 10% probability that I will be able to repay nothing. The annualized return on a 1-year Treasury is 1%. What is my total promised payment (principal plus interest) at time 1? Assume the world is risk-neutral with perfect markets.
Homework Answers
| Answer: $17,159.40 | |
| Calculation: | |
| The expected promised payment = 20500*101%*68%+14000*22% = | $ 17,159.40 |
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