Question
The spread on a one-year BBB-rated bond relative to the risk- free Treasury of similar maturity is 2%. It is estimated that the contribution to
The spread on a one-year BBB-rated bond relative to the risk- free Treasury of similar maturity is 2%. It is estimated that the contribution to this spread by all noncredit factors (e.g., liquidity risk, taxes) is 0.8%. Assuming the recovery rate for the underlying credit is 60%, what is, approximately, the implied default probability for this bond? USE THIS FORMULA:
= + (1 ) +rp (risk premium)
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Investments Analysis and Management
Authors: Charles P. Jones
12th edition
978-1118475904, 1118475909, 1118363299, 978-1118363294
