3. (20 pts) Credit risk measures using the reduced form model: assume a company has the following values for its debt issue.

Face value of the firms debt: K = $1,000

Time to maturity of the debt (tenor): T t = 1 year (T = maturity)

Default intensity (approx prob of default per year): = 0.03

Loss given default: = 0.3 (30%)

P(t,T) = 0.95

(a) Calculate the probability that the debt will default over the time to maturity.

(b) Calculate the expected loss.

(c) Calculate the present value of the expected loss.