The risk-free rate of interest is constant and is 10%. The credit spread for an issuer is
Question:
The risk-free rate of interest is constant and is 10%. The credit spread for an issuer is also constant and is 3%. If the recovery rate is 40%, then given continuous compounding,
(a) What is the probability of default over a two-year period?
(b) What is the price of a two-year $1 zero-coupon bond issued by this firm? Assume all cash flows occur at maturity, whether or not the bond defaults in the interim period.
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To calculate the probability of default over a twoyear period we can use the credit spread and the r...View the full answer
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