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Consider a firm whose 1-year zero-coupon risky bonds currently yield 6%. The yield on 1-year zero-coupon Treasury security is 3%. Assume periodicity of 1 (i.e.

Consider a firm whose 1-year zero-coupon risky bonds currently yield 6%. The yield on 1-year zero-coupon Treasury security is 3%. Assume periodicity of 1 (i.e. annual compounding). What is this firms implied probability of default if the recovery rate expected by bondholders is 40%?

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