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Suppose that German sovereign bonds have zero risk of default and have a yield of 3.4% per annum. Assume that Greek sovereign bonds have a
Suppose that German sovereign bonds have zero risk of default and have a yield of 3.4% per annum. Assume that Greek sovereign bonds have a 10% per annum probability of default and upon default are expected to pay 60% of par value. What is the equilibrium credit default swap rate of Greek sovereign bonds for German sovereign bonds? Assume that investors are risk neutral toward Greek bond default
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