A Bond Has a Current Value of $950 and Promises

question 15

Multiple Choice

A bond has a current value of $950 and promises to pay $1,000 at the end of 4 years.The expected return on the asset is 12% and the risk free rate is 3%.If the actual cash payout in case of default is 0,what is the risk neutral default probability given that the asset has a standard deviation of 18%?

• A) 15.2%
• B) 21.5%
• C) 33.2%
• D) 49.6%

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Definitions:

Stress

A physical or emotional response to demands or pressures, which can stem from various aspects of life including work, relationships, or financial troubles.

Hans Selye

A Hungarian-Canadian endocrinologist known for his research on the response of organisms to stress.

Stress Types

Varieties of stress categorized typically by cause, duration, or effect on an individual, such as acute, chronic, or eustress.

Inner Conflict

Psychological struggle within oneself arising from opposing demands or impulses.