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Lecture 8 - Tutorial

This document provides 3 questions and answers about corporate bonds. Question 1 asks to calculate the implied probability of default given a bond spread of 230 basis points over the risk-free rate and an expected recovery rate of 40%. Question 2 asks to calculate the expected loss given default with a probability of default of 3.0% and expected recovery rate of 45%. Question 3 asks to calculate the probability of default in year 3 if the probability of default in any year is 2.1%, conditional on no default in earlier years.

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Carmen Alexandra Iamandii
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39 views

Lecture 8 - Tutorial

This document provides 3 questions and answers about corporate bonds. Question 1 asks to calculate the implied probability of default given a bond spread of 230 basis points over the risk-free rate and an expected recovery rate of 40%. Question 2 asks to calculate the expected loss given default with a probability of default of 3.0% and expected recovery rate of 45%. Question 3 asks to calculate the probability of default in year 3 if the probability of default in any year is 2.1%, conditional on no default in earlier years.

Uploaded by

Carmen Alexandra Iamandii
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Lecture Eight Corporate Bonds

Question 1 Using an expected recovery rate of 40%, what is the implied probability of default if a corporate bond is trading at a spread over the risk-free rate of 230 basis points? Answer:

Question 2
If the probability of default is 3.0% and the expected recovery rate is 45% then what is the expected loss given default? Answer:

Question 3 If the probability of default in any year is 2.1%, conditional on no default in earlier years, then what is the probability of default in year 3? Answer:

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