Use the Following Information for Questions

Multiple Choice

Use the following information for questions
Mr.Joseph Brown would like to borrow $100 from your bank to invest in a project that will pay off one period from now.This project is risky and its payoff depends on Mr.Brown's effort in managing it.If the project is successful, it pays off $400, but if it's unsuccessful, it pays nothing.Mr.Brown can choose two levels of effort, high or low.If he chooses high effort level, he suffers a personal cost of $75, but there is no personal cost associated with choosing the low effort level.With the two effort levels, the probability that the project will succeed is 0.7 and 0.5 for the high and low effort levels, respectively.The riskless interest rate is 5%, and the use of collateral is costly since for every $1 collateral the bank values it at 90 cents.Assume that you cannot observe Mr.Brown's effort.
-If a secured loan is offered instead, what will be the interest rate on the loan to induce Mr.Brown to expend high effort round to the nearest decimal) ?

A) 50%
B) 37.5%
C) 22.37%
D) 20.83%
E) 15.21%