1. Assume the interest rate in the market for one-year zero-coupon government bo
ID: 2614015 • Letter: 1
Question
1. Assume the interest rate in the market for one-year zero-coupon government bonds is i = 8% and the rate for one-year zero-coupon grade BBB bonds is k = 10.2%. What is the implied probability of repayment on the corporate bond (round to two decimals)?
A. 2.00%
B. 2.04%
C. 97.96%
D. 98.00%
34.
2. Assume the interest rate in the market for one-year zero-coupon government bonds is i = 7.5% and the rate for one-year zero-coupon grade BB bonds is k = 11.8%. What is the implied probability of default on the corporate bond (round to two decimals)?
A. 3.85%
B. 4.00%
C. 96.00%
D. 96.15%
1. Assume the interest rate in the market for one-year zero-coupon government bonds is i = 8% and the rate for one-year zero-coupon grade BBB bonds is k = 10.2%. What is the implied probability of repayment on the corporate bond (round to two decimals)?
Explanation / Answer
1
Implied probability of repayment on corporate bond = (1+rgov) / (1+rcorp)
Implied probability of repayment on corporate bond = (1+.08) / (1+.102)
Implied probability of repayment on corporate bond = (1.08) / (1.102) = 0.9800 or 98%Ans D
2
Implied probability of repayment on corporate bond = (1+rgov) / (1+rcorp)
Implied probability of repayment on corporate bond = (1+.075) / (1+.118)
Implied probability of repayment on corporate bond = (1.075) / (1.118) = 0.9615 or 96.15%
Implied probability of default on corporate bond = 1-prob. Of repayment
Implied probability of default on corporate bond = 1-96.15 => 0.385 or 3.85% Ans. A
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