Hi, please could someone explain where my understanding is wrong for this question. My understanding is: The bank want an annual expected return of 10%, therefore they want to receive 10000*1.1 = 11000 from the customer. The bank will receive 10000*(1+k)^3 if the customer does not default and nothing if the customer does default. So my attempt was.. 0.857*10000*(1+k)^3 = 11000 so k = 0.087. Thanks in advance
Ah I see where I went wrong, annual expected return therefore they want to receive 10000*1.1^3 = 13310
