Wells Fargo is considering making a $50 million loan to Boeing. The annual interest rate...
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Wells Fargo is considering making a $50 million loan to Boeing. The annual interest rate on this loan is 10%. Boeing is supposed to pay interest at the end of year 1, and interest plus principal at the end of year 2. The survival rate is 92% per year and the recovery rate is 50%. The Credit Default Swap spread is 4%. If Wells Fargo decides to make the loan, it will also purchase a CDS to hedge the credit risk. In year 1, the expected cash flow to Wells Fargo is_____________ if the loan does not default and the expected cash flow is __________ if the loan defaults. The probability for this loan to default in year 2 is __________
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