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The market portfolio of an investment bank consists of various securities. One of them is...

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The market portfolio of an investment bank consists of various securities. One of them is a one-year bond outstanding with a principal of 100. The bond pro vides a coupon of 5% per year payable annually. The yield on the bond (expr [Page 6 of 2] NBS8203/LBS8203 essed with continuous compounding) is 2.5%. The risk-free rate is 1.2% for all maturities. The recovery rate is 20%. Defaults can only take place at year end or half-way through each year. Estimate the risk-neutral default rate and bri efly discuss the outcome of your calculations based on the relevant concepts (bond valuation, risk-free rate, recovery rate, risk-neutral default rate)

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