2. Consider the case of a simple one-period framework. If i = 12.50%, k = 14.85%

Question

2. Consider the case of a simple one-period framework. If i = 12.50%, k = 14.85%, p = 0.98, and g = 0.85 what is the required risk premium (round to two decimals)?

3. Assume that B = $200 000, r = 1 year, i = 7%, d = 0.9, N(h1) = 0.174120 and N(h2) = 0.793323.

Using Moody's KMV Credit Monitor model, what is the required risk premium on the loan (round to two decimal places)?

4. Assume that i1 = 11% and i2 = 12%, and that k1 = 14.50% and k2 = 16.50%.

What is the expected probability of repayment on the one-year corporate bonds in one year's time (round to two decimals)?

Explanation / Answer

Since, multiple questions have been posted and each question is independent of another, I have answered the first question (Question 2).

____

Question 2:

The required risk premium can be calculated with the use of following equation:

Required Risk Premium = (1+i)/(p+g - p*g) - (1+i)

Using the value provided in the question in the above formula, we get,

Required Risk Premium = (1+12.50%)/(.98+.85 - .98*.85) - (1+12.50%) = .34% (answer)

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