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Question
Use the following information and the option valuation model for the next two problems. Onyx Corporation has a $200,000 loan that will mature in one year. The risk free interest rate is 6 percent. The standard deviation in the rate of change in the underlying asset's value is 12 percent, and the leverage ratio for Onyx is 0.8 (80 percent). The value for N(h1) is 0.02743, and the value for N(h2) is 0.96406.
What is the required yield on this risky loan?
A. 6.165 percent.
B. 6.00 percent.
C. 0.165 percent.
D. 5.835 percent.
E. None of the above.
Answer
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