1) Consider a no-interest loan with current rating BB, maturity of 3 years and amount to be repaid at maturity of $100 million. The recovery rate in case of default is 50% of the repayment value. Assume a default probability of 4.95% and the following yield curve for a BB-rated corporate: 1 year Time to maturity Spot rate 2 years 7.01% 4 years 3 years 7.21% 5 years 7.58% 6.80% 7.43% Required (1) (ii) Calculate the future expected value and volatility 1 year ahead for this loan Assuming that the future returns of the borrower's assets follow a standard normal distribution, compute the default threshold of the borrower and explain how it can be used to generate future rating scenarios and loan values (18 marks)