Essay
Consider an individual who plans to buy a new home. He has two options: (i) pay for mortgage insurance (that insures the lender in case the borrower defaults), or (ii) pay the lender a higher interest rate for the mortgage. Describe how these two options are related to the concept
of risk premium and the lender's aversion to risk. Why does the interest rate on the mortgage differ in these two options?
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In option (ii), the risk premium on the ...View Answer
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