Discuss default risk of bond in detail-00162
This subjective question is related to the book/course
vu cs001 Computer Proficiency License .
It can also be found in
vu cs001 Mid Term Solved Past Paper No. 1.
Question 1: Discuss default risk of bond in detail.
Suppose risk free rate is 10%
ABC corp. issue one year bond at 10%
Price without risk= (100 +10)/1.1= Rs.100
Suppose, there is probability that ABC corp. goes bankrupt, get nothing than two possible payoffs: Rs.110 and Rs.0
Answer:
Default Risk
It is define as that "there is no guarantee that a bond issuer will make the payment which he promised.
When there is higher default risk the higher the probability that those who have the bond will not receive the promised payments and thus higher the yield.
The investor which are risk averse require some compensation for risk, more compensation is require for higher risk.
For exampleSuppose risk free rate is 10%
ABC corp. issue one year bond at 10%
Price without risk= (100 +10)/1.1= Rs.100
Suppose, there is probability that ABC corp. goes bankrupt, get nothing than two possible payoffs: Rs.110 and Rs.0
