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?