Exercise 2: Consider a two period loan. The current value of the loan is 100 AUD. The loan pays interest and principal at the end of the second period.

a) We assume no default probability. The single period return for the first period is 5% and the single period return for the second period is 10%. Calculate the total repayment after the second period.

b) In difference to subquestion a) the default probability for the first period is 5% and for the second period is 10%. The financial institution still wants the same expected repayment as in subquestion a). What is the promised repayment after the second period?