Abstract
This paper analyzes a model of bank loan repayment as a signalling game. The model has shown that under asymmetric information a borrower reaches for renegotiation and debt forgiveness to a greater extent than is required by the return of the project financed with loan. In the equilibrium the borrower pays the lesser of an amount equal to the liquidation value or the amount of payment specified in the credit agreement. To offset the impact of the renegotiation options, interest rate specified in the loan agreement should ex ante take into account the liquidation value of the borrower's assets. The paper also proposes an example of utilisation of our theoretical model and the Monte Carlo method to determine the loan interest rate for a commercial loan.
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