Carman County Bank (CCB) has a $5 million face value outstanding adjustable-rate loan to a company that

Question:

Carman County Bank (CCB) has a $5 million outstanding adjustable-rate loan to a company that has a leverage ratio of 80 percent. The current risk-free rate is 6 percent and the time to on the loan is exactly ½ year. The asset risk of the borrower, as measured by the standard deviation of the rate of change in the value of the underlying assets, is 12 percent. The normal density function values are given below.
h N(h) h N(h)
-2.550.00542.500.9938
-2.600.00472.550.9946
-2.650.00402.600.9953
-2.700.00352.650.9960
-2.750.00302.700.9965
a. Use the Merton option valuation model to determine the market value of the loan.
b. What should be the interest rate for the last six months of the loan? Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...