Which of the following is a correct statement regarding expected rates of return and bankruptcy?
A)Bankruptcy is costly to lenders. Therefore, lenders charge lower rates to borrowers judged to be more at risk of going bankrupt.
B)Bankruptcy is costly to lenders. Therefore, lenders charge similar rates to borrowers judged to be more at risk of going bankrupt, compared to solvent borrowers.
C)Bankruptcy is costly to lenders. Therefore, lenders charge higher rates to borrowers judged to be more at risk of going bankrupt.
D)Bankruptcy is not costly to lenders. Therefore, lenders charge the same interest rates to borrowers judged to be more at risk of going bankrupt, compared to solvent borrowers.

Question

Quizplus · Accepted Answer

Bankruptcy is costly to lenders, as they may not receive full repayment on their loans. Therefore, lenders charge higher rates to borrowers judged to be more at risk of going bankrupt to compensate for the increased risk.

Which of the Following Is a Correct Statement Regarding Expected