Question
Suppose that you want to estimate the implied default probability for a BB-rated discount corporate bond. The T-bond (a risk-free bond) yields 12% per year.
Suppose that you want to estimate the implied default probability for a BB-rated discount corporate bond.
The T-bond (a risk-free bond) yields 12% per year.
The one-year BB-rated discount bond yields 15.8% per year.
The two-year BB-rated discount bond yields 18% per year.
If the recovery rate on a BB-rated bond is expected to be 0%, and the default probability in year one is 5%, which of the following is the best estimate of the risk-neutral probability that the BB-rated discount bond defaults within the next two years?
- 6.85%
- 3.28%
- 9.91%
- 10.14%
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Security And Loss Prevention An Introduction
Authors: Philip Purpura CPP Florence Darlington Technical College
7th Edition
0128117958, 9780128117958
