Compute the expected recovery value

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1. Repeat the previous problem, only compute the expected recovery value instead of the default probability. How does the expected recovery value change as time to maturity changes?

2. Suppose that there is a 3% per year chance that the firm's asset value can jump to zero. Assume that the firm issues 5-year zero-coupon debt with a promised payment of $110. Using the Merton jump model, compute the debt price and yield, and compare to the results you obtain when the jump probability is zero.

Reference no: EM131368526

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