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NEW QUESTION: 1
A corporate bond maturing in 1 year yields 8.5% per year, while a similar treasury bond yields 4%. What is the probability of default for the corporate bond assuming the recovery rate is zero?
A. 4.50%
B. 8.50%
C. 4.15%
D. Cannot be determined from the given information
Answer: C
Explanation:
Explanation
The probability of default would make the future cash flows from both the bonds identical. If p be the probability of default, the cash flows from the risky corporate bond would be
= (cash flows in the event of default x probability of default) + (cash flows without default x (1 - probability of default))
=> p*0 + (1 - p)*(1 + 8.5%) = (1 - p)*1.085.
The cash flows from the treasury bond would be 1.04. These two should be equal, ie,
1.04 = (1- p)*1.085, implying p = 4.15%.
(Note: The above is a simplification intended for the exam. In reality investors would demand a 'credit risk premium' for the corporate bond over and above the expected default loss rate. They are unlikely to be happy with just being compensated with exactly the expected default loss rate plus the risk-fre rate because the expected default loss rate itself is uncertain. They would demand some premium over and above what the default rate alone might mathematically imply above the risk free rate. In this question, this credit risk premium is ignored.)
NEW QUESTION: 2
All of the following are examples of externalities except which one?
A. Pollution resulting from a production process
B. Firms training workers who then move to other employers
C. Some consumers being unable to afford goods because prices have been driven up by the demand from other consumers
D. Road congestion caused by rush hour traffic on the roads
Answer: C
NEW QUESTION: 3
Which of the following is the MAXIMUM data transfer rate of Bluetooth v3.0?
A. 24Mbps
B. 1Mbps
C. 3Mbps
D. 54Mbps
Answer: A
NEW QUESTION: 4
Hotspot Questions
Which three statements about the Cisco IPS appliance configurations are true? (Choose three.)
A. Events Summarization is globally disabled.
B. Threat Rating Adjustment is globally disabled.
C. The Meta Event Generator is globally enabled.
D. The maximum number of denied attackers is set to 10000.
E. The block action duraton is set to 3600 seconds.
Answer: C,D,E
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