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%

Answer 1

1

Implied probability of repayment on corporate bond = (1+r_gov) / (1+r_corp)

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+r_gov) / (1+r_corp)

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