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(b) Imagine that the nominal interest rate on a risky bond issued by Firm A is 12%. The nominal risk-less interest rate is set by

(b) Imagine that the nominal interest rate on a risky bond issued by Firm A is 12%. The nominal risk-less interest rate is set by the Central Bank at 2%. Investors are not risk adverse. What is the probability that firm A defaults on its bonds, in percentage points?

(c) Imagine that the probability that Firm B goes bankrupt is 9%. The Central Bank sets the nominal risk-less interest rate at 3%. Investors are not risk-averse. What is the nominal interest rate on the bonds of Firm B, in percentage points?

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