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Traveller’s Trust (TT) is a US trust company that is about to participate in a new bank loan syndication. TT is looking to reduce moral hazard costs when transferring credit risk and wants to identify the optimal fraction of the loan to sell. If TT’s value of one dollar of additional capital is 99% and k (constant for monitoring costs) is 40, what is the optimal fraction of the loan that TT should sell using the approximation equation? A. 60%. B. 80%. C. 40%. D. 20%. |