In a One-Period World, If the Conditional Yield Degradation Is

question 7

Essay

In a one-period world, if the conditional yield degradation is 20%, the unconditional default probability is 10%, and the lender wants an expected return of 5%, what contract yield must the loan carry?

---

Definitions:

Evaluate

To assess or determine the value, significance, or extent of something.

Six-figure Accuracy

Six-figure accuracy refers to a level of precision in which a number is accurate to six significant digits, indicating extremely precise measurement or calculation.

Evaluate

To evaluate or gauge the worth, importance, or magnitude of something.

Six-figure Accuracy

A measure of precision that implies numerical values are accurate to within plus or minus one out of a hundred thousand.