Hi I am sorry if the pictures are out of order. It begins with question 1.

4. What is the amount that Loan B's lender will forgive lie. the payoff to the borrowefs default option] in each state of nature at t=1? Hint: The lender has to forgive the difference between the promised payment and the collateral value. iiiM if the property value is 120 $M if the property value is 90 5. The present value (i.e.. premium] of the borrower's default option is $3.1M. What is the present value of Loan 3 for the lender? _$ M 6. What is the credit spread for Loan B? '36 Hint: The credit spread is the difference in YTM between a credit-risky loan and a riskle55 loan. The YTM is the IRR on the basis of the promised payment. 7. What is the expected rate of retom and the risk premium to Loan B? The expected rate of return is 95 and the risk premium is 96. Hint: The expected rate of return is based on the expected payoff in the future. The risk premium is the difference in the expected return between a credit-risky loan and a riskless loan. Equhv B. What is the payoff to the levered equity position in Property A for each state of nature at t=1? The equity investor {borrower} uses Loan B to nance the property investment. 5121 if the property value is 120 .5 M if the property value is 90 $M if the property value is 90 9. What is the present value of the equity?_$ M Hint: There are two methods to calculate the equity value. Method 1: Recall the balance sheet: Property value = Debt + Equity. Method 2: The equity DCF based on the expected rate of return to the equity that is calculated in Q10. 10. What is the expected rate of return to equity? 5%. Hint: If you already calculated the equity value in Q9, you can simply calculate the expected rate of return. Alternatively, if you want to rst calculate the expected rate of return to equity, you can use the WACC formula. 11. Compare the present value of equity with the present value of the following asset portfolio: a long property, a short riskless debt, and a long default option. Should they be equal or different? The PV of equity is :5 M [copied from Q9]. The P'v' Portfolio: Propertyvalue {$100M} - Riskless debt i_$ M copied from Q2} + Default Option [Sim copied from Q4 and Q5} = H These two values should be madam}. There is a $100M property [Property A} that will be worth either $120M or $90M in one year with an equal probability [5096:5096]. In this exercise, you will analyze the return to a non'recourse collateralized loan and the levered equity. Year 0 1 probablly 110 0.5 100