Economics: The Basics 1st Edition by Mike Mandel

Exercise 10

The interest rate a lender charges a borrower depends not only on the risk of default but also on whether the borrower offers collateral-that is, an asset the lender can repossess if the borrower can't repay the loan. If two borrowers have an equal chance of default, but one has collateral and the other doesn't, which one should pay a higher interest rate? Why?