Question $2$

A Financial Institution considers a $1-$year loan with the following attributes

The Financial Institution estimates that the borrower of the loan has a $1-$year default

probability of $0\mathrm{.}20\%$; however, if default happens, no value can be recovered from this loan.

$($a$)(5$ marks$)$ What is the gross return per dollar lent of this loan?

$($b$)(5$ marks$)$ What is the expected loss of this loan due to default risk?