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Assuming the loss given default rate for the underlying

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The spread on a one-year BBB-rated bond relative to the risk-free Treasury of similar maturity is 2%. It is estimated that the contribution to this spread by all noncredit factors (e.g., liquidity risk, taxes) is 0.8%. Assuming the loss given default rate for the underlying credit is 60%, what is, approximately, the implied default probability for this bond?

A. 3.33%

B. 5.00%

C. 3.00%

D. 2.00%

Reference no: EM13568916

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