There is a $100M property (Property A) that will be worth either $120M or $90M in one year with an equal probability (50%/50%). In this exercise, you will analyze the return to a non-recourse collateralized loan and the levered equity.

1. What is the expected rate of return to Property A? Hint: The amount of investment is $100M.

2. What is the present value (for the lender) of a $95M, one-year, zero-coupon, riskless loan? The riskless rate of return is 1%. Hint: The borrower promises to pay $95M at t =1 and no other payment.

3. What is the lenders payoff in each state of nature at t=1 for a $95M, one-year, zero-coupon, risky, non-recourse loan (Loan B) that is collateralized by Property A? Hint: The borrower promises to pay $95M dollars at t=1, but may strategically default on the loan.

$ ___________M if the property value is 120

$ ___________M if the property value is 90