The following represents two yield curves. What is the implied probability of repayment on one-year B - rated debt?

Question

The following represents two yield curves.  What is the implied probability of repayment on one-year B - rated debt?

Quizplus · Accepted Answer

To find the implied probability of repayment on one-year B-rated debt, we need to look at the intersection of the one-year maturity and the B-rated yield on the yield curve. According to the curve shown in the image, the B-rated yield for one-year debt is approximately 6.5%. Using the formula for the probability of default implied by the yield, we get:

Probability of Default = (1 - e^(-Yield x Time to Maturity)) x 100%
= (1 - e^(-0.065 x 1)) x 100%
= 6.91%

Therefore, the implied probability of repayment is:

Probability of Repayment = 100% - Probability of Default
= 100% - 6.91%
= 93.09%, or approximately 97.17% to the nearest whole number.

So, the correct answer is B.

The Following Represents Two Yield Curves