fullofquestions
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The market trades a 1-year bond at 50bp credit spread, and a 3-year bond at 60bp. In the USD market conditions as of fall 2001 and with a recovery rate of 50%, what is the implicit probability of default before year 3?
a. 1%
b. 2% (ANS)
c. 3% (ANS)
d. 4%
At the moment, I have not seen a problem of this type before, so any equations/tips appreciated. Also, don't know why the answer is both b and c. Any thoughts?
a. 1%
b. 2% (ANS)
c. 3% (ANS)
d. 4%
At the moment, I have not seen a problem of this type before, so any equations/tips appreciated. Also, don't know why the answer is both b and c. Any thoughts?
