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Calculate The Implied Probability Of Repayment For A B-Rated Debt

Question

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 B‑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 B‑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 B‑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 B‑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.

Summary

These short questions belong to Finance and it is about calculating the implied probability of repayment for 1 year B-rated debt, the expected rate for 1 year on the B-rated debt, the spread expected in 1 year maturity on the debt, expected probability of default in 2 year maturity for B-rate debt.

Total Word Count 66

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