What is the cumulative probability of repayment

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Coogee Bank has made a one-year loan to Slippery Wave, a firm that manufactures surfboards. The estimated probability of default of this loan is 5%. The estimated loan recovery rate upon loan default is 0%. The bank has also made a two-year loan to Slippery Wave that provides a return of 10% per annum if the loan is not defaulted. And the bank will lose all the claims on principal and interests upon loan default. The yield is 2% per annum for the 1-year maturity government bond. Based on the prices of 1-year and 2-year maturity government bond prices, the forward rate for the 2nd year is 4% per annum.

What is the cumulative probability of repayment (i.e. not default) of Slippery Wave over the two years? (please choose the closest answer)

Reference no: EM132691035

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