Suppose the firm issues a single zero-coupon bond with maturity value $100.
a. Compute the yield, probability of default, and expected loss given default for times to maturity of 1, 2, 3, 4, 5, 10, and 20 years.
b. For each time to maturity compute the approximation for the yield:
ρ = r + 1 / T × Pr(default) × Expected loss given default
How accurate is the approximation?
Assume that a firm has assets of $100, with σ = 40%, α = 15%, and δ = 0. The risk-free rate is 8%.