Suppose the expected probability of survival in year 2 decreases from p1 = 0.9 in year 1 to 0.80 in year 2 (p2).

During the same period, the default risk free interest rate stays the same at 4 percent. What will be the risk premium for the second year, assuming the same collateral structure if the firm survives through year 1? What is the cumulative probability of default over the 2-year period?

Answer rating: 100% (QA)

Risk premium 20 Cumulative probability of default 028 Ex... View the full answer