Suppose the interest rates in the market for one-year, zero-coupon Treasury strips and for one-year, zero-coupon grade B corporate bonds are, respectively: i = 2.05% k = 7.80% Compute the probabilities of repayment and default as well as the risk premium.

Suppose the interest rates in the market for one-year, zero-coupon Treasury strips and for one-year, zero-coupon grade B corporate bonds are, respectively: i = 2.05% k = 7.80% Compute the probabilities of repayment and default as well as the risk premium.

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter7: Types And Costs Of Financial Capital

Section: Chapter Questions

Problem 2EP

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

Suppose the interest rates in the market for one-year, zero-coupon Treasury strips and for one-year, zero-coupon grade B corporate bonds are, respectively:

i = 2.05% k = 7.80%

Compute the probabilities of repayment and default as well as the risk premium.

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