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The risk-free rate is 2% per year and a corporate bond yields 4% per year. Assuming a recovery rate of 40% on the corporate
The risk-free rate is 2% per year and a corporate bond yields 4% per year. Assuming a recovery rate of 40% on the corporate bond. 1) What is the approximate market implied one year probability of default of the corporate bond in a risk neutral world? (2 points) 2) Assuming 0.8% risk premium for a risk averse investor, what is the approximate market implied one year probability of default of the corporate bond? (2 points)
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