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Which of the following explain why financial instruments, such as bonds or loans, carry a default risk? Check all that apply. A natural disaster An
Which of the following explain why financial instruments, such as bonds or loans, carry a default risk? Check all that apply.
A natural disaster
An unexpectedly large budget surplus
A firm that issued bonds expanded too quickly and its revenue fell
A firm that issued bonds expanded too quickly and its revenue rose above the expected level
Let be the market interest rate the borrower i pays at time ; let be the interest rate a borrower who has no default risk would pay
at time and let be the default risk premium borrower i must pay at time
Which of the following represents the default risk premium DRP
I
Suppose that in December Redondo & Sons Corporation issues a bond that pays At the same time, the US Treasury, when it issues debt,
pays an interest rate of
Based on the formula for the default risk premium,
must pay a DRP of
because the rate on
is considered the riskfree rate.
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