Carman County Bank (CCB) has a $5 million face value outstanding adjustable-rate loan to a company that has a leverage ratio of 80 percent. The current riskfree rate is 6 percent and the time to maturity on the loan is exactly ½ year. The asset risk of the borrower, as measured by the standard deviation of the rate of change in the value of the underlying assets, is 12 percent. The normal density function values are given below.

a. Use the Merton option valuation model to determine the market value of the loan.

b. What should be the interest rate for the last six months of the loan?
The questions and problems that follow refer to Appendix 10A.

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h N(h) h N(h) -2.55 0.0054 2.50 0.9938 -2.60 0.0047 2.55 0.9946 -2.65 0.0040 2.60 0.9953 -2.70 0.0035 2.65 0.9960 -2.75 0.0030 2.70 0.9965