1. Joe and Sam each go to Integrity Bank to get a loan. The bank offers them loans at spreads of 4% and 5%, respectively. The bank expects to earn 6% on both loans and expects to earn nothing in default. What does Integrity Bank think of Joe and Sams chances of default?

2. A semi-annual coupon bond has a coupon of 6% and its duration is 5.78 years. It trades at a yield of 7%, or a price of $94.54 per $100 face. The comparable Treasury rate is 5%. If the yield curve shifts up across the board by 50 bp and the spread increases to 280 bp, what is the new price of the bond?

3. You are seeking a bank loan for $12000 and go to Prosper Bank and to Skyline Bank to see which loan has a lower rate. Your plan is to open a restaurant, which is quite risky. Prosper Bank expects that it could recover $10,000 if you defaulted while Skyline thinks it would only recoup $9000. However, Skyline puts your probability of repayment at 97% while Prosper only has it at 96%. Which loan has the lower interest rate? Assume both banks are aiming to earn 6%. __________________

4. Mrs. Jones has borrowed $5500 from a pawn shop. She uses hand sanitizer as collateral. If she does not pay back the loan in a year with 18% interest, the pawn shop expects to sell the sanitizer for a net value of $3700. The pawn shop lends out money expecting to earn a return of 8%. What is the likelihood that Mrs. Jones will default on her loan? (round 2 decimal places) ________

5. T/F

A bank that buys the CDX North America contract can reduce its transactions costs relative to buying protection on all 125 single reference names.___

b. The typical spread on a junk bond is 400 bp whereas the typical CDS premium on a junk bond is only 50 bp. ___