East Point Bank has outstanding of a $5 000 000 face value, adjustable rate loan to a company that has a leverage ratio of 80 per cent. The current risk-free interest rate is 6 per cent, and the time to maturity on the loan is exactly year. The asset risk of the borrower, as measured by the standard deviation of the rate of change in the value of the underlying assets, is 12 per cent. The normal density function values are given below: ( Assume N(h1) = 0.003778 & N(h2) = 0.995123)

Use the Merton option valuation model to determine:

1. Calculate h1 and h2
2. The market value of the loan
3. The loan rate