The following represents two yield curves. $$\begin{array} { | l | c | c | }
\hline \text { Maturity } & \begin{array} { c }
\text { Pure Discount } \
\text { Treasury Yields }
\end{array} & \begin{array} { c }
\text { B-rated Corporate Bond Yields } \
\text { (Pure Discount Bonds) }
\end{array} \
\hline 1 \text { year } & 3 \text { percent } & 6 \text { percent } \
\hline 2 \text { year } & 6 \text { percent } & 10 \text { percent } \
\hline 20 \text { year } & 12 \text { percent } & 17 \text { percent } \
\hline
\end{array}$$
-What is the implied probability of repayment on one-year B-rated debt?

Question

The following represents two yield curves. $$\begin{array} { | l | c | c | } 
\hline \text { Maturity } & \begin{array} { c } 
\text { Pure Discount } \
\text { Treasury Yields }
\end{array} & \begin{array} { c } 
\text { B-rated Corporate Bond Yields } \
\text { (Pure Discount Bonds) }
\end{array} \
\hline 1 \text { year } & 3 \text { percent } & 6 \text { percent } \
\hline 2 \text { year } & 6 \text { percent } & 10 \text { percent } \
\hline 20 \text { year } & 12 \text { percent } & 17 \text { percent } \
\hline
\end{array}$$
-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 use the formula:

Implied probability of repayment = 1 / (1 + Yield)

The yield on one-year B-rated debt is given as 6%, so the implied probability of repayment is:

Implied probability of repayment = 1 / (1 + 0.06) = 0.9434 = 94.34%

Therefore, the closest answer choice is B) 97.17 percent, which is the result of rounding up the implied probability of repayment to the nearest hundredth.

The Following Represents Two Yield Curves -What Is the Implied Probability of Repayment on One-Year B-Rated