A bank has made a loan charging a base lending rat...
A bank has made a loan charging a base lending rate of 10 percent. It expects a probability of default of 5 percent. a. If the loan is defaulted, the bank expects to recover 50 percent of its money through the sale of its collateral. What is the expected return on this loan? b. Suppose the bank expects to recover 80 percent of its money through the sale of its collateral. What is the expected return on this loan? c. Compare your results in a) and b), is it correct to say that the bank can always increase the expected return from a loan by requiring more collateral?