International Finance. Lecture 5. World Financial Markets and Institutions. International Banking and Money Market International Bond Market International Equity Markets Futures and Options on Foreign Exchange Currency and Interest Rate Swaps International Portfolio Investment.
A 1-year bond is issued by a corporation that has 1% probability of default. In case of default the recovery rate is zero. The 1-year yield on default-free bond is rf=5%. If an investor is risk-neutral, what is the required bond yield r (using so-called certainty equivalent) and credit spread?