Because creditors can foresee,to at least some extent,the costs of bankruptcy,they charge an interest rate that has a premium built into it to compensate for the present value of bankruptcy costs.

Question

Quizplus · Accepted Answer

Creditors usually charge a premium interest rate to compensate for the potential cost of bankruptcy, as they are aware that there is always a chance that the borrower may not be able to repay the loan. This premium helps to cover the present value of bankruptcy costs that creditors may incur in case the borrower defaults on the loan.

Because Creditors Can Foresee,to at Least Some Extent,the Costs of Bankruptcy,they