Next two questions are based on the information given below : An investor, Jack, holds a two year fixed rate bond of $100 million from a company and the bonds rating is B. The bond coupon rate is 6%. The following table 1 represents the credit matrix, which shows the historical credit risk migration in one year. Table 2 shows the different discount rate of three types of the bond. Also, loss given default rate is 60%. Based on the information of the bond, answer question 5 and 6.

Table 1.

	A	B	C	Default
B	2%	97%	0.8%	0%

Table 2

	Discount Rate Table
A	4%
B	5%
C	8%
Default	7%

1. Jack wants to estimate the expected price of the bond next year. He knows that if the bond is upgraded to A, the price would be 6 + 106 / 1.04 = 107.923. He knows that if the bond is downgraded to C, the price would be 6 + 106 / 1.08 = 104.148. Now, Jack wants you to help him finish the calculation in different scenarios and get the estimated price of the bond next year. Table 3 can be used to estimate the expected price next year (Round Numbers to Three Decimal Places)

A. 106.82

B. 106.83

C. 106.88

D. 108.91

Table 3.

Original Bond Rating B	A	B	C	Default
Value	107.923		104.148
Probability	2%	97%	0.80%	0.20%
Expected Value
Probability * (Value - Expected Value) ^2

2. Based on your calculation, Jack further estimates the standard deviaiton. He now has 99% confidence that the bond value would not be lower than which of the following value next year? (Assume that there is 98% chance that observations lie between 2.33 and -2.33 standard deviations from the mean.)

A. 83.81

B. 68.22

C. 100.07

D. 16.6

3. The dark side of retail risk is perpetuated by all of the following factors except:

A. capital set aside to protect a bank in the event of default

B. process flaws resulting in high risk applicants receiving credit

C. new products which do not have sufficient historical loss data

D. a social acceptance of bankruptcy and borrowers "walking away" from their obligations