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Implied probability of repayment

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The following represents two yield curves. Maturity Treasury Yields B-rated Corporate Bond Yields 1 year 3 percent 6 percent 2 year 6 percent 10 percent 20 year 12 percent 17 percent

a) What is the implied probability of repayment on one-year B-rated debt?

b) What interest rate is expected on a one-year B-rated corporate bond in one year? (Hint: Use the implied forward rate.)

c) What spread is expected between the one-year maturity B-rated bond and the one-year Treasury bond in one year?

d) What is the expected probability of default in year 2 of two-year maturity B-rated debt?

e) What is the probability that two-year B-rated corporate debt will be fully repaid?

Reference no: EM133062525

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