QUESTION 5

1. The Bank of Fast Loans uses the following rating scheme to classify the riskiness of its customers.

   Risk Class	Risk Premium (%)
   Prime	.05
   High grade	1.0
   Upper medium grade	1.5
   Lower medium grade	2.0
   Speculative: Non-investment grade	4.0
   Speculative: Highly	6.0
   Substantial risks	9.0
   Extremely speculative	12.0

   The banks pure rate of interest is 2% and the inflation premium is 3.5%. The bank offers an annual rate of 7.68% to a customer. What is the risk class of this customer?

   	A.	Speculative: Non-investment grade
   	B.	Speculative: Highly
   	C.	Lower medium grade
   	D.	Substantial risks
   	E.	Upper medium grade
   	F.	High grade