(a) The expected payoff is $99. The discounted expected payoff is $99/1.05 ≈ $94.286. The promised yield is therefore $100/$94.286 − 1 ≈ 6.06%.

(b) This borrower would believe the value to be $100/1.05 ≈ $95.238. Therefore, the borrower believes he has to overpay by about 95 cents.