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Fund manager John Smith hopes to buy a corporate bond to maximize his portfolio’s return. The one-year zero-coupon bond that John is considering has a default probability of 30%. To hedge against this risk of default, North thinks he should buy insurance on the bond that which will pay him 80% of the bond’s par value at maturity should the company default. Assume the risk free rate is 10%. What is the risk-neutral price of the insurance contract?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91617671

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