Multiple Choice
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 today's fair price for this bond?
A) $0.875
B) $0.895
C) $0.915
D) $0.935
Correct Answer:
Verified
Correct Answer:
Verified
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