A corporate bond that pays 4% per annum semi-annually has a yield of 3% p.a. with continuous compounding and a remaining life of 1.5 years (immediate after coupon payment). The yield on a similar risk-free bond is 2% p.a. with continuous compounding. The risk-free rates are 1% p.a. with continuous compounding for all maturities. Assume that the unconditional probability of default per every six months is a constant and that defaults can happen at the end of every six months (immediate before coupon payment). The recovery rate is 40%. Estimate the unconditional probability of default using the “more exact calculation”.
A corporate bond that pays 4% per annum semi-annually has a yield of 3% p.a. with continuous compounding and a remaining life of 1.5 years (immediate after coupon payment). The yield on a similar risk-free bond is 2% p.a. with continuous compounding. The risk-free rates are 1% p.a. with continuous compounding for all maturities. Assume that the unconditional probability of default per every six months is a constant and that defaults can happen at the end of every six months (immediate before coupon payment). The recovery rate is 40%. Estimate the unconditional probability of default using the “more exact calculation”.
A First Course in Probability (10th Edition)
10th Edition
ISBN:9780134753119
Author:Sheldon Ross
Publisher:Sheldon Ross
Chapter1: Combinatorial Analysis
Section: Chapter Questions
Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...
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A corporate bond that pays 4% per annum semi-annually has a yield of 3% p.a. with
continuous compounding and a remaining life of 1.5 years (immediate after coupon
payment). The yield on a similar risk-free bond is 2% p.a. with continuous compounding. The risk-free rates are 1% p.a. with continuous compounding for all maturities.
Assume that the unconditional
and that defaults can happen at the end of every six months (immediate before coupon
payment). The recovery rate is 40%. Estimate the unconditional probability of default
using the “more exact calculation”.
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