Question: 5. An underwriter issues a new 7-year C-rated bond at par. The anticipated recovery rate in default of the bond is expected to be 55%.

5. An underwriter issues a new 7-year C-rated bond at par. The anticipated recovery rate in default of the bond is expected to be 55%. What should be the coupon rate on the bond so that its expected return is 9%? Assume the transition matrix of exercise 2.
1 0 0 0 0
0.06 0.9 0.03 0.01 0
= 0.02 0.05 0.88 0.05 0
0 0 0 0 1
0 0 0 0 1

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