Q4-A firm wants to lend $200 per period. The firm knows of a default-free government agency which promises to pay an interest of 5% per period per $200 invested. The firm has identified a borrower with the following credit information who wants to borrow exactly $200: It is believed that the borrower will pay back in full the loan and its interest with probability of 98%, the borrower will will repay half of the loan amount with 1% probability, and will default and not pay anything with 1% probability. 1. What is the firm's expected return from lending? (10 pts.) 2. Would the firm lend at the above expected rate? (Must reason) (5 pts.) 3. What is the least amount of capital that the borrower needs to promise to pay back to the firm which would induce the firm to lend? (10 pts.) 4. Determine the promised rate of return for the lender? (10 pts.) 5. What is the default risk premium? (5 pts.) Q4-A firm wants to lend $200 per period. The firm knows of a default-free government agency which promises to pay an interest of 5% per period per $200 invested. The firm has identified a borrower with the following credit information who wants to borrow exactly $200: It is believed that the borrower will pay back in full the loan and its interest with probability of 98%, the borrower will will repay half of the loan amount with 1% probability, and will default and not pay anything with 1% probability. 1. What is the firm's expected return from lending? (10 pts.) 2. Would the firm lend at the above expected rate? (Must reason) (5 pts.) 3. What is the least amount of capital that the borrower needs to promise to pay back to the firm which would induce the firm to lend? (10 pts.) 4. Determine the promised rate of return for the lender? (10 pts.) 5. What is the default risk premium? (5 pts.)