Suppose the firm issues a single zero-coupon bond with time to maturity 3 years and maturity value

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Suppose the firm issues a single zero-coupon bond with time to maturity 3 years and maturity value $110.
a. Compute the price, yield to maturity, default probability, and expected recovery (E[BT |Default]).
b. Verify that equation (27.5) holds.
Assume that a firm has assets of $100, with σ = 40%, α = 15%, and δ = 0. The risk-free rate is 8%. Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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Derivatives Markets

ISBN: 978-0321543080

4th edition

Authors: Rober L. Macdonald

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