Problem:
The following represents two yield curves.
|
Maturity
|
Pure Discount Treasury Yields
|
B-rated Corporate Bond Yields (Pure Discount Bonds)
|
|
1 year
|
3 percent
|
6 percent
|
|
2 year
|
6 percent
|
10 percent
|
|
20 year
|
12 percent
|
17 percent
|
1. What is the implied probability of repayment on one-year B 'rated debt?
a. 95.00 percent.
b. 97.17 percent.
c. 94.00 percent.
d. 97.00 percent.
e. 97.09 percent.
2. What rate is expected on a one-year Bâ€'rated corporate bond in one year? (Hint: Use the implied forward rate.)
a. 10.0 percent.
b. 9.09 percent.
c. 14.15 percent.
d. 12.0 percent.
e. 17.0 percent.
3. What spread is expected between the one-year maturity Bâ€'rated bond and the one-year Treasury bond in one year?
a. 3.00 percent.
b. 5.06 percent.
c. 4.00 percent.
d. 5.00 percent.
e. 7.00 percent.
4. What is the expected probability of default in year 2 of two-year maturity Bâ€'rated debt?
a. 2.83 percent.
b. 3.00 percent.
c. 4.43 percent.
d. 2.68 percent.
e. 5.00 percent.
5. What is the probability that two-year Bâ€'rated corporate debt will be fully repaid?
a. 92.9 percent.
b. 95.6 percent.
c. 97.2 percent.
d. 7.10 percent.
e. 4.40 percent.
Additional Information:
These short questions is from Finance and it is about computing the implied probability of repayment for 1 year B-rated debt, the expected rate for 1 year on B-rated debt, the spread expected in 1 year maturity upon the debt, expected probability of default in 2 year maturity for B-rate debt.