Q. Consider the risk premium formula presented: (1+i) = (1-p)(1+i+x)+p(0), the symbols have their usual meanings?

i. If the probability of bankruptcy is 10%, what is the risk premium if the interest rate on a risk free bond is 1%? Show your work.

ii. Calculate the nominal interest for a borrower when the probability of bankruptcy is 5% and the nominal policy interest rate is 3%. Show your work.