A firm is issuing two-year debt in the amount of $200,000. The current market value of the assets is $300,000. The risk-free rate is 4 percent and the standard deviation of the rate of change in the underlying assets of the borrower is 20 percent. Using an options framework, determine the following:

a. The current market value of the loan.

b. The risk premium to be charged on the loan.

 LO.1