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Suppose We Have a Zero-Coupon Bond That Pays $1 After

question 20

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Suppose we have a zero-coupon bond that pays $1 after one year if the issuing firm is not in default. If the firm is in default the recovery rate is 40%. The one-year risk free interest rate in simple terms is 5% and the risk-neutral probability that the firm defaults is 10%. What is the fair credit spread on the bond (again, in simple terms) ?


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