Consider a borrower, Kiddie Toys, Inc., that can choose between two projects, S and R. Project S yields $150 with probability 0.8 and zero with probability 0.2, whereas project R yields $162 with probability 0.5 and nothing with probability 0.5. The bank’s cost of funds is equal to the riskless interest rate of 5%. As a banker, you cannot control your borrower’s project choice directly because you cannot observe this choice. You are restricted to making unsecured loans. Assume universal risk neutrality. Moreover, you can charge Kiddie Toys not more than 150 basis points above your breakeven interest rate or it will switch to another bank. Compute the expected payoffs to Kiddie Toys and the bank under the following scenarios: (i) the bank and the borrower can contract with each other over only one period, and (ii) the bank and the borrower can contract over two time periods. In case (i), Kiddie Toys will request a single loan of $100, and in case (ii), Kiddie Toys will need a sequence of two $100 loans, with the ability to choose between S and R in each period.