The spread between the yield on a 3-year corporate bond and the yield on a similar risk-
Question:
The spread between the yield on a 3-year corporate bond and the yield on a similar risk- free bond is 50 basis points. The recovery rate is 30% Estimate the average default intensity per year over the 3-year period 30.2.
Suppose that in Problem 20.1 the spread between the yield on a 5-year bond issued by the same company and the yield on a similar risk-free boad is 60 basis points. Assume the same recovery rate of 30%. Estimate the average default intensity per year over the 5-year period. What do your results indicate about the average default intensity in years 4 and 5 30.3.
Should researchers use real-world oe risk-neutral default probabilities for
(a) calculating credit value at risk and
(b) adjusting the price of a derivative for defaults? 30.4.
How are recovery rates usually defined?
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