Suppose that over the next year, one of three things could happen to a company's credit rating. It could remain investment grade, drop to non-investment grade or default. The value of a credit derivative that pays $100 in 1-year if the company's credit rating remain investment grade is $93. The value of a credit derivative that pays $200 in 1-year if the company's credit rating drops to non-investment grade is $7. The value of a credit derivative that pays $300 in 1-year if the company defaults is $6. Calculate the risk-free rate and the risk-neutral probability of default. (answers to 4 decimal places)

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Suppose that over the next year, one of three things could happen to a company's credit rating. It could remain investment grade, drop to non-investment grade or default.
The value of a credit derivative that pays $100 in 1-year if the company's credit rating remain investment grade is $93.
The value of a credit derivative that pays $200 in 1-year if the company's credit rating drops to non-investment grade is $7.
The value of a credit derivative that pays $300 in 1-year if the company defaults is $6.
Calculate the risk-free rate and the risk-neutral probability of default. (answers to 4 decimal places)
 
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