The graph below explains why some /nations may choose to default on their loan.

Question

The graph below explains why some /nations may choose to default on their loan. The graph shows that:

Select one:

a. Higher the amount of loan, higher is the risk of default.

b. Higher the interest rate, higher is the risk of default.

c. Lower is the penalty of default, higher is the risk of default.

d. All of the above.

Benefits and costs of not repaying this period Cost of not repaying (C) assets that could be seized denial of benefits of future credit, macroeconomic costs, general loss of reputation, etc. Co 0 Dlimit Stock of debt (D)

Explanation / Answer

All the given options are apt as amount of loan increases it will increse the default risk as per the graph we can see cost of default becomes smaller than benefits

Lower the penality of default higher is the risk of default

Hence Optio n D is correct response

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