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Corporate bond in risk neutral world

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Reference no: EM133111870

The risk-free rate is 2% per year and a corporate bond yields 4% per year. Assuming a recovery rate of 40% on the corporate bond.

1. What is the approximate market implied one year probability of default of the corporate bond in a risk neutral world?

2. Assuming 0.8% risk premium for a risk averse investor, what is the approximate market implied one year probability of default of the corporate bond?

Reference no: EM133111870

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