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  • Name: Rabita Qayoom ENROLLMENT: 02-112172-031

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    Rabita Qayoom
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    Rabita Qayoom with enrollment number 02-112172-031. The document discusses why the probability of a borrower paying back a promised return decreases when the risk premium and fees are increased. Increasing the risk premium and fees raises the financial burden on the borrower, decreasing the likelihood they can pay back the promised return. It also raises the default risk premium, an additional fee charged to borrowers who are unable to make payments.

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    Rabita Qayoom with enrollment number 02-112172-031. The document discusses why the probability of a borrower paying back a promised return decreases when the risk premium and fees are increased. Increasing the risk premium and fees raises the financial burden on the borrower, decreasing the likelihood they can pay back the promised return. It also raises the default risk premium, an additional fee charged to borrowers who are unable to make payments.

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    14 views1 page

    Name: Rabita Qayoom ENROLLMENT: 02-112172-031

    Uploaded by

    Rabita Qayoom
    Rabita Qayoom with enrollment number 02-112172-031. The document discusses why the probability of a borrower paying back a promised return decreases when the risk premium and fees are increased. Increasing the risk premium and fees raises the financial burden on the borrower, decreasing the likelihood they can pay back the promised return. It also raises the default risk premium, an additional fee charged to borrowers who are unable to make payments.

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    © All Rights Reserved
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    NAME: RABITA QAYOOM

    ENROLLMENT: 02-112172-031

    QUESTION

    Why does the probability of borrower to pay the promise return decreases when the risk premium
    and fees is increased?

    ANSWER

    Increase in the risk premium and fees will increase the chances of default. Firstly, increase in risk
    premium and fees will increase the financial burden on the borrower which will in turn decrease the
    probability of a borrower to pay the promised return. The danger that the borrower will not pay the
    return will earn the lender a default risk premium. Default risk premium is an additional fee that is
    charged to the borrower who is unable to pay the promised return. The Financial Institutions may do
    so in order to protect their investments.

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