The current on-year risk free rate is 6%.

The rate charged on a one-year, $5,000,000 loan to XYZ Corp. is 10%. The bank estimates that in the event of default it can recover 80% of what it is owed.

a.)Based on this information, what is the bank's estimate of the probability that XYZ Corp. will default?

b.)If the bank changes its estimate of the probability of default so that it is 85% of what it was when it set the rate of 10%, what rate should it charge on the loan?