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The spread on a one-year BBB-rated bond relative to the risk-free treasury of similar maturity...

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Finance

The spread on a one-year BBB-rated bond relative to the risk-free treasury of similar maturity is 1.4%. It is estimated that the contribution to this spread by all non-credit factors (e.g., liquidity risk, taxes) is 0.4%. Assuming the loss rate given default (LR) for the underlying credit is 40%, what is, approximately, the implied default probability for this bond?

  1. 1.67%
  2. 2.33%
  3. 3.50%
  4. 2.50%

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