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Rating AAA AA A BBB BB B CCC/C --Time horizon (years)-- 1 0.00 0.02 0.05 0.16 0.63 3.34 28.30 2 0.03 0.06 0.13 0.43 1.93 7.80 38.33 3 0.13 0.11 0.22 0.75 3.46 11.75 43.42 Use the following table of default probability (data from S&P Global Ratings) for this part: In addition, assume that the recovery rate of a defaulted bond is 60%. 1. The table shows that 1)........% (two decimal places) of a bond rated AA would default. Based on the recovery rate, the loss rate is 2)......% (round to the nearest unit). Accordingly, on the average, the holder of a A bond maturing in one year will need a credit spread of at least 3)...... basis points (round to the nearest unit) to realize an investment return equivalent to a risk-free asset of the same maturity. In other words, if the one-year risk-free rate is 1.05%, the yield of a A bond should be at least 4....... (two decimal places). Only 3 and 4 required. Please show workings or give explanations.

Rating AAA AA A BBB BB B CCC/C --Time horizon (years)-- 1 0.00 0.02 0.05 0.16 0.63 3.34 28.30 2 0.03 0.06 0.13 0.43 1.93 7.80 38.33 3 0.13 0.11 0.22 0.75 3.46 11.75 43.42 Use the following table of default probability (data from S&P Global Ratings) for this part: In addition, assume that the recovery rate of a defaulted bond is 60%. 1. The table shows that 1)........% (two decimal places) of a bond rated AA would default. Based on the recovery rate, the loss rate is 2)......% (round to the nearest unit). Accordingly, on the average, the holder of a A bond maturing in one year will need a credit spread of at least 3)...... basis points (round to the nearest unit) to realize an investment return equivalent to a risk-free asset of the same maturity. In other words, if the one-year risk-free rate is 1.05%, the yield of a A bond should be at least 4....... (two decimal places). Only 3 and 4 required. Please show workings or give explanations.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Rating AAA AA A BBB BB B CCC/C --Time horizon (years)-- 1 0.00 0.02 0.05 0.16 0.63 3.34 28.30 2 0.03 0.06 0.13 0.43 1.93 7.80 38.33 3 0.13 0.11 0.22 0.75 3.46 11.75 43.42 Use the following table of default probability (data from S&P Global Ratings) for this part: In addition, assume that the recovery rate of a defaulted bond is 60%. 1. The table shows that 1).........% (two decimal places) of a bond rated AA would default. Based on the recovery rate, the loss rate is 2).....% (round to the nearest unit). Accordingly, on the average, the holder of a A bond maturing in one year will need a credit spread of at least 3)....... basis points (round to the nearest unit) to realize an investment return equivalent to a risk-free asset of the same maturity. In other words, if the one-year risk-free rate is 1.05%, the yield of a A bond should be at least 4)......% (two decimal places). Only 3 and 4 required. Please show workings or give explanations.
Transcribed Image Text:Rating AAA AA A BBB BB B CCC/C --Time horizon (years)-- 1 0.00 0.02 0.05 0.16 0.63 3.34 28.30 2 0.03 0.06 0.13 0.43 1.93 7.80 38.33 3 0.13 0.11 0.22 0.75 3.46 11.75 43.42 Use the following table of default probability (data from S&P Global Ratings) for this part: In addition, assume that the recovery rate of a defaulted bond is 60%. 1. The table shows that 1).........% (two decimal places) of a bond rated AA would default. Based on the recovery rate, the loss rate is 2).....% (round to the nearest unit). Accordingly, on the average, the holder of a A bond maturing in one year will need a credit spread of at least 3)....... basis points (round to the nearest unit) to realize an investment return equivalent to a risk-free asset of the same maturity. In other words, if the one-year risk-free rate is 1.05%, the yield of a A bond should be at least 4)......% (two decimal places). Only 3 and 4 required. Please show workings or give explanations.
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