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:

Prefrontal Lobe

A region at the front of the frontal lobes of the brain, associated with complex behaviors, decision making, and moderating social behavior.

Afferent Fibers

Afferent Fibers are nerve fibers that carry sensory information from the sensory receptors in the periphery of the body towards the central nervous system.

Hypothalamus

Found beneath the thalamus, it is a central area in the brain that governs both the autonomic nervous system and pituitary gland activities, thereby regulating critical homeostatic mechanisms such as body temperature, thirst, hunger, and other systems vital for bodily homeostasis.

Limbic System

A complex system of nerves and networks in the brain, involved with instinct and mood. It controls the basic emotions (fear, pleasure, anger) and drives (hunger, sex, dominance, care of offspring).