An investor bought a two-year, 8% loan with face value of $1,000, with one interest payment of $80 due in one year and a fifinal interest and principal of $1,080 due in two years. Each of these payments is subject to the probability of default. Assume that a company's hazard rate is a constant 6% per year. Assume the recovery rate is 50%. The investor also purchased CDS on the company with the premiums paid quarterly over the next five years.

(a) (3 points) What is the probability of survival for the first year?

(b) (5 points) What is the conditional probability of survival for the second yearr?

(c) (5 points) What is the probability of survival (through the second year)?

(d) (5 points) What is the probability of default (during the first two years)?

(e) (7 points) What is the loss given default?

(f) (5 points) What is the expected loss?

Answer rating: 100% (QA)

a To calculate the probability of survival for the first year we need to use the hazard rate The hazard rate represents the instantaneous probability ... View the full answer