David:
Please help me in solving the following questions...
1) The US Government Bond Zero Curve give a 1-year semiannual yield of 4
percent, on the same basis a corporate security has a yield of 5
percent.
What is the market implied 1-year default probability of the corporate
security. The recovery rate is 88.6 percent?
a) 0.974%.
b) 1.000%.
c) 9.000%.
d) 0.184%
Convert the semiannual yield to annual yield and use 1-p=1-(1+i)/(1+k)
And answer is a, here I am not using recovery rate..
I can also solve the above by: solve following equation for p (default
prob):
1.04 = (1-p)*1.05 + p*0.886*1.05
You get 8.54% and I see 9% as close answer.
Thanks,
Narendar
Please help me in solving the following questions...
1) The US Government Bond Zero Curve give a 1-year semiannual yield of 4
percent, on the same basis a corporate security has a yield of 5
percent.
What is the market implied 1-year default probability of the corporate
security. The recovery rate is 88.6 percent?
a) 0.974%.
b) 1.000%.
c) 9.000%.
d) 0.184%
Convert the semiannual yield to annual yield and use 1-p=1-(1+i)/(1+k)
And answer is a, here I am not using recovery rate..
I can also solve the above by: solve following equation for p (default
prob):
1.04 = (1-p)*1.05 + p*0.886*1.05
You get 8.54% and I see 9% as close answer.
Thanks,
Narendar