Question: The corporate bonds of Wellcare Ltd, a cosmetics retailer, are trading 4% above the government bond rate of 8%. Loans given to retailers by Safe

The corporate bonds of Wellcare Ltd, a cosmetics retailer, are trading 4% above the government

bond rate of 8%. Loans given to retailers by Safe Bank Ltd that are defaulted on have a recovery rate

of 50%

a) What is the probability that Wellcare Ltd will default on its loan repayment to Safe Bank Ltd?

b) What is the minimum interest rate at which Safe Bank Ltd is likely to make a loan of

$1,000,000.00 to Wellcare Ltd? (Round answer to the nearest percentage point).

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