(A) Legae Investment Bank has credited Magong-Reno Platinum Mine with R750m, with a maturity of two years. The probability of loan default (PD) is 1.75%, and the recovery rate

14 is assumed to be 25%. Calculate the expected loss for Legae Investment Bank's loan to Magong-Reno Platinum Mine. (10 Marks )

(B) As Head of Relationship Banking at the Royal Bank of Transkei, you are negotiating pricing with Songololo Municipality, which insists on an interest rate of 12% on the proposed short-term credit facility. What would the implied PD at this rate be if the one-year treasury bill rate is 8%? (5 Marks)