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An $85M, one-year, zero-coupon, collateralized, risky loan provides a 1.49% expected return (based on the expected payoff rather than the promised payment). The collateral property
An $85M, one-year, zero-coupon, collateralized, risky loan provides a 1.49% expected return (based on the expected payoff rather than the promised payment). The collateral property is currently worth $100M and will be either $130M or $80M in one year with an equal probability (50%/50%). The risk-free rate is 1%. What is the implied dollar value of the default option for this risky debt? Can you please include work to find this answer as well? Thank you.
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