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(Rate with LGD, risk-averse lender) Assume a bank can invest in a government bonds at a risk-free rate of 3.2%. Alternatively, it can invest in
(Rate with LGD, risk-averse lender) Assume a bank can invest in a government bonds at a risk-free rate of 3.2%. Alternatively, it can invest in a corporate bond with a default probability of 7.1%. If the issuer defaults, the bank expects to lose 26.1% of the investment. A risk-averse bank that requires an additional premium of 1.4% as a result of risk aversion would be indifferent between investing in the government bond and the corporate bond if the corporate bond offers a rate of _________ %.
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