The risk-free rate of interest is constant and is 10%. The credit spread for an issuer is
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The risk-free rate of interest is constant and is 10%. The credit spread for an issuer is also constant and is 2%. If the recovery rate is 50%, all componding and discounting is continuous, and default is assumed to occur at the end of the year,
(a) What is the probability of default in one year?
(b) What is the price of a one-year $1 zero-coupon bond issued by this firm?
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Let the probability of default in one year be p The price of the defau...View the full answer
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