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An investment costs $480 and offers a payoff of $600 with probability p and 0 with probability 1-p. Time-equivalent Treasuries offer an interest rate of
An investment costs $480 and offers a payoff of $600 with probability p and 0 with probability 1-p. Time-equivalent Treasuries offer an interest rate of 5%. Assume risk neutrality, i.e. the expected return on any security of the same time duration should be the same regardless of how risky the payoff is.
What is the probability of default.
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