Subsidized loans have the effect of:
A) Increasing the NPV of the loan, thereby reducing the APV.
B) Decreasing the NPV of the loan, thereby reducing the APV.
C) Decreasing the NPV of the loan, thereby increasing the APV.
D) Increasing the NPV of the loan, thereby increasing the APV.

Question

Quizplus · Accepted Answer

Subsidized loans come with lower interest rates, making them cheaper for borrowers. This reduces the NPV (net present value) of the loan as the cost of borrowing is lower. However, since the loan becomes cheaper, it increases the APV (adjusted present value) as the borrower can afford to take on more debt. Therefore, the correct choice is D – increasing the NPV (by reducing the cost of borrowing) and increasing the APV (by increasing affordability).

Subsidized Loans Have the Effect Of