Suppose that B = $500 and A₀ = $470,α = 9%,r = 4%,σ = 17%,and δ = 0.If T = 8,what is the recovery rate assuming risk neutral default probability?

Question

Quizplus · Accepted Answer

The recovery rate is given by:$$R = B * (1 - (1 - α) * (1 - r) * (1 + σ)^T) / (1 - δ)$$$$R = 500 * (1 - (1 - 0.09) * (1 - 0.04) * (1 + 0.17)^8) / (1 - 0)$$$$R = 500 * (1 - (0.91) * (0.96) * (3.105848)) / (1)$$$$R = 500 * (1 - 0.269) / (1)$$$$R = 500 * 0.731 / (1)$$$$R = 365.5$$

Suppose That B = $500 and A₀ = $470,α =