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One-year zero-coupon bonds issued by the government of Pretzelbourg currently trade at a large discount. The bonds mature in one year. Bond traders believe that
One-year zero-coupon bonds issued by the government of Pretzelbourg currently trade at a large discount. The bonds mature in one year. Bond traders believe that the probability of a default before maturity is 50%, and that in case of a default, the recovery will be 50% of face value. If the appropriate discount rate for this type of risk is 9.5%, how large is the discount?
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