A firm is issuing a two-year loan in the amount of $200,000. The current market value of the borrower’s assets is $300,000. The risk-free rate is 4 percent and the standard deviation of the rate of change in the underlying assets of the borrower is 20 percent. Using an options framework, determine the following:
a. The current market value of the loan.
b. The risk premium to be charged on the loan.