Sauntrybank is a mortgage lender on the frontier. It makes simple 5 year balloon payment mortgages at a fixed interest rate. The geography of the frontier is such that the most valuable use for land is growing apples. Apple trees grow faster in wet years than in dry ones and land with bigger trees is more valuable than land with small tree. The probability of wet and dry years is equal and IID. After a wet year the value of the land grows by 4% after a dry year it declines by 4%. Initially the value of the land is $50 an acre. Income (net of all expenses except for land) is 5% of the land value. The riskless interest rate is 3%. 2A. 8pt. After five years what is the range (note not the distribution) of possible values of land? 2.B 2pts. If Cquntrybank decides to issue only riskless mortgages what is the Loan to Value ratio it must set? 2.C 1pts. If Sountrybank chooses an LTV of 0.85 what is the probability of default? (hint if there is at least one wet year what is the value of the land?). When does default occur if it does happen? 1.D 2pts If Countrybank chooses an LTV of 0.85 what interest rate should it charge? Sauntrybank is a mortgage lender on the frontier. It makes simple 5 year balloon payment mortgages at a fixed interest rate. The geography of the frontier is such that the most valuable use for land is growing apples. Apple trees grow faster in wet years than in dry ones and land with bigger trees is more valuable than land with small tree. The probability of wet and dry years is equal and IID. After a wet year the value of the land grows by 4% after a dry year it declines by 4%. Initially the value of the land is $50 an acre. Income (net of all expenses except for land) is 5% of the land value. The riskless interest rate is 3%. 2A. 8pt. After five years what is the range (note not the distribution) of possible values of land? 2.B 2pts. If Cquntrybank decides to issue only riskless mortgages what is the Loan to Value ratio it must set? 2.C 1pts. If Sountrybank chooses an LTV of 0.85 what is the probability of default? (hint if there is at least one wet year what is the value of the land?). When does default occur if it does happen? 1.D 2pts If Countrybank chooses an LTV of 0.85 what interest rate should it charge