1.Assume that a one-year Treasury strip is currently yielding 5.5 per cent and a AAA-rated discount bond...

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1.Assume that a one-year Treasury strip is currently yielding 5.5 per cent and a AAA-rated discount bond with similar maturity is yielding 8.5 per cent.

If the expected recovery from collateral in the event of default is 50 per cent of principal and interest, what is the probability of repayment of the AAArated bond? What is the probability of default?

What is the probability of repayment of the AAA-rated bond if the expected recovery from collateral in the case of default is 94.47 per cent of principal and interest? What is the probability of default?

What is the relationship between the probability of default and the proportion of principal and interest that may be recovered in case of default on the loan? LO 10.10

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