Strong Bank has made a loan to Risky Corporation. Loan Terms include

a. Default risk-free borrowing rate: 8%

b. Risk Premium of 3%

c. Origination fee of 0.1875%

d. 9% Compensating Balance Requirement

e. Required Reserves at the Fed:6%

f. Probability of complete payment: 98%

1. What is the CONTRACTUALLY PROMISED gross return on the loan?

2. What is the EXPECTED Return on the loan given the introduction of Default Risk.