A customer has apprached a bank for $20,000 one-year loan at a18% interest rate. If the bank does not approve this loanapplication the $20,000 will be invested in bonds that earn a 5%annual return. The bank will charge the customer an up-front $200legal fee if the loan is granted. The bank believes that there a p%chance that this customer will default on the loan, assuming thatthe loan is approved. If the customer defaults on the loan tha banlwill lose $10,000. Should the bank make the loan?..
If the objective is to maximize the bank's profit, whar is thesmallest value of p for the which the bank should not grant theloan? (Obviously as p decreases, the profitability of the loanincreases.)
Explain please
