#### Suzanne Evans

##### Well-Known Member

**Questions:**

211.1. The risk-free rate is 2.00% and a corporate bond has a yield of 3.50% per annum. It is estimated that the contribution to the spread by all non-credit factors is 40 basis points; e.g., liquidity risk. The recovery rate estimate is 75.0%. What is an approximation (emphasis on "approximation") for the implied default probability?

a. 1.90%

b. 2.50%

c. 4.40%

d. 6.00%

211.2. The risk-neutral default probability of a one-year corporate BB-rated bond is 5.0% with an estimated loss given default (LGD) of 65.0% while the risk-free rate is 2.0%. If we assume an annual compound frequency, which is nearest to the yield of the corporate bond?

a. 3.57%

b. 4.29%

c. 5.43%

d. 6.60%

211.3. The following three corporate bonds trade

- Bond A has a price of $97.00, pays no coupon, estimated loss given default (LGD) of 50.0%, and matures in one year
- Bond B has a price of $95.00, a coupon rate of 1.0% (payable semi-annually), estimated LGD of 45.0%, and matures in 1.5 years
- Bond C has price of $96.00, a coupon rate of 2.0% (payable semi-annually), estimated LGD of 40.0%, and matures in 2.0 years

a. Bond A

b. Bond B

c. Bond C

d. Cannot determine

**Answers:**