1. Borrowers Yash and Zara each are supposed to pay off their loans of $100,000 each next year. The bank which issued the loans has bundled the two loans and sold the cash flow to investors Alice and Bob. Alice will receive first $120,000 and Bob will receive any remaining cash flow.

If a borrower does not default, then he or she repays the loan in full. If a borrower defaults, 40% of the loan amount is recovered. Yash and Zara are both likely to default with probability 10%. Calculate the expected cash flows of Alice and Bob (no discounting needed) under the following probability distributions:

a.

	Zara defaults	Zara does not default
Yash defaults	1%	9%
Yash does not default	9%	81%

b.

	Zara defaults	Zara does not default
Yash defaults	5%	5%
Yash does not default	5%	85%

c.

	Zara defaults	Zara does not default
Yash defaults	10%	0%
Yash does not default	0%	90%