1) Consider a no-interest loan with current rating BB, maturity of 3 years and amount to be repaid at maturity of $100 million. The recovery rate in case of default is 50% of the repayment value. Assume a default probability of 4.95% and the following yield curve for a BB-rated corporate:

Time to maturity	1 year	2 years	3 years	4 years	5 years
Spot rate	6.80%	7.01%	7.21%	7.43%	7.58%

Required

1. Calculate the future expected value and volatility 1 year ahead for this loan
2. Assuming that the future returns of the borrowers assets follow a standard normal distribution, compute the default threshold of the borrower and explain how it can be used to generate future rating scenarios and loan values