A corporate bond yields 10% per year, whereas the risk-free rate is 5%. Assume a recovery...
A corporate bond yields 10% per year, whereas the risk-free rate is 5%. Assume a recovery rate of 80% on the corporate bond. What is the market-implied one year default probability of the corporate bond?
Homework Answers
A corporate bond yields 10% per year, whereas the risk-free rate is 5%.
Assume a recovery rate of 80% on the corporate bond.
The market-implied one year default probability of the corporate bond = (1+r_f) / (1+rcorp)
= (1+ 0.05 / 1+ 0.8)
= 0.583
The market-implied one year default probability of the corporate bond is 0.583.
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