Consider a One-Year Zero-Coupon Defaultable Bond $$r$$ And $$S$$ Denote,respectively,the Risk-Free Interest Rate and the Spread on the Bond,where

question 19

Multiple Choice

Consider a one-year zero-coupon defaultable bond.Let $$r$$ and $$S$$ denote,respectively,the risk-free interest rate and the spread on the bond,where both are expressed in simple terms with annual compounding.Suppose the risk-neutral probability of default $$\lambda$$ and the recovery rate of the bond in default $$\phi$$ remain fixed.Then,an increase in the risk-free rate must be accompanied by

• A)An increase in the spread.
• B)A decrease in the spread.
• C)No change in the spread.
• D)A change in the spread that can be positive,negative,or zero.

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Definitions:

Uncertainty Reduction

Efforts or strategies to decrease the ambiguity and lack of information in decision-making or forecasting future events.

Market Trends

Patterns and tendencies observed in the market indicating the general direction in which a market or industry is moving.

Dark Side

Aspects of an entity or situation that are negative or harmful, often hidden or not openly acknowledged.

Buyer-supplier Relationships

The ongoing interactions and engagements between organizations purchasing goods or services and their providers, which can impact supply chain efficiency and product quality.