What may happen to the Delta’s initial credit parameter and the value of its loan if the machinery industry experiences adverse structural changes?

Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment.

What may happen to the Delta’s initial credit parameter and the value of its loan if the machinery industry experiences adverse structural changes?
A . Probability of default and loss at default may decrease simultaneously, while duration rises causing the loan value to decrease.
B . Probability of default and loss at default may decrease simultaneously, while duration falls causing the loan value to decrease.
C . Probability of default and loss at default may increase simultaneously, while duration rises causing the loan value to decrease.
D . Probability of default and loss at default may increase simultaneously, while duration falls causing the loan value to decrease.

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Answer: D