Suppose there are two ratings categories: A and B, along with default. The ratings-migration probabilities look like this for a B-rated loan:

Rating in 1 year

Probability

A 0.05 B 0.9 Default 0.05

The yield on A rated loans is 5%; the yield on B rated loans is 10%. All term structures are flat (i.e. forward rates equal spot rates). A loan in default pays off 50%.

c. Using the mean from part b as the benchmark, compute the 1-year VaR with 95% confidence interval for each loan (based on the actual distribution). (5 points)