If the hazard rate is $\lambda = 0.2$ , the risk-free rate is zero, then if the price of a one-year $100 face value discount bond is $85, then what is the expected recovery rate $\phi$ on default of the bond?
A) 17%
B) 24%
C) 40%
D) 55%

Question

Quizplus · Accepted Answer

The expected recovery rate is given by $\phi = 1 - \frac{P}{F}$, where P is the price of the bond and F is the face value of the bond. In this case, P = $85 and F = $100, so $\phi = 1 - \frac{85}{100} = 0.15$.

If the Hazard Rate Is λ=0.2\lambda = 0.2λ=0.2 , the Risk-Free Rate Is Zero, Then If the Price

If the Hazard Rate Is $\lambda = 0.2$ , the Risk-Free Rate Is Zero, Then If the Price