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A zero-coupon bond has par value $95 and one year to maturity, at which time it may default. From Merton's model, you estimate that the
A zero-coupon bond has par value $95 and one year to maturity, at which time it may default. From Merton's model, you estimate that the risk-neutral probability of default to be 20% and the present value of recovery to be $51. Find the expected value that will be recovered at maturity, given risk-free interest rate of 5%. Hint: in default, it's the recovery value at that point; if there is no default, it's the par value.
a. | $95 | |
b. | $86.72 | |
c. | $53.61 | |
d. | $86.20 |
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