Assume the interest rate in the market for one-year zero-coupon government bonds is i = 7.5% and the rate for one-year zero-coupon grade BB bonds is k = 11.8%.What is the implied probability of default on the corporate bond (round to two decimals)?

Question

Quizplus · Accepted Answer

The implied probability of default can be calculated using the formula: Probability of Default = 1 - (1 + i) / (1 + k). Substituting the given values: 1 - (1 + 0.075) / (1 + 0.118) = 0.0385 or 3.85%.

Assume the Interest Rate in the Market for One-Year Zero-Coupon