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Suppose you can earn 1% interest in a secure savings account. A prospective borrower wants a loan with a five year lump sum repayment. You

Suppose you can earn 1% interest in a secure savings account. A prospective borrower wants a loan with a five year lump sum repayment. You judge that this borrower has a 15% risk of default. At the breakeven interest rate, what is the standard deviation of your return? Let P equal the amount borrowed.

1. 0.44P

2. 0.88P

3. 4.4P

4. 8.8P

5. 11.2P

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