LNW Bank is charging a 12 percent interest rate on a $5,000,000 loan. The bank also charged $100,000

in fees to originate the loan. The bank has a cost of funds of 8 percent. The borrower has a five percent

chance of default and if default occurs, the bank expects to recover 90 percent of the principal and

interest.

Saunders - Chapter 12

43. What is the expected return on the loan using the KMV model?

A. 6.50 percent

B. 5.50 percent

C. 6.00 percent

D. 14.0 percent

E. 13.5 percent

44. What is the risk of the loan using the KMV model?

A. 4.75 percent

B. 0.48 percent

C. 6.89 percent

D. 2.18 percent

E. 1.50 percent