Question: 11. (optional) A financial institution estimates that a 2-year loan that pays an annual coupon in year 1 and 2 and repays the entire principal

11. (optional) A financial institution estimates that a 2-year loan that pays an annual coupon in year 1 and 2 and repays the entire principal at maturity has a probability of payment in years 1 and 2 equal to: p₁ = 97.0%, and p₂ = 94.0%. Expected recovery rates in the event of default are: g₁ = 65%, g₂ = 45%. The 1-year risk free rate, i₁, is 1.25%, and the 1-year forward rate for

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