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A company would like to borrow a $1 million loan from the bank for 3 years. This...
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A company would like to borrow a $1 million loan from the bank for 3 years. This borrower has an AA credit rating on the bond market. The bank has collected related corporate bond returns and government bond returns, presented in the following table.
What’s the probability for the bank to get back the loan and interests at the maturity date?
Table 1 Bond ratings and return rates with different maturities | |||||
| 1 year | 2 year | 3 year | 4 year | 5 year |
AAA | 3.50% | 4.20% | 4.30% | 5.45% | 6.60% |
AA | 3.60% | 4.60% | 4.80% | 5.55% | 6.90% |
A | 4.10% | 4.90% | 5.50% | 5.95% | 7.20% |
BBB | 5.30% | 5.60% | 5.80% | 6.50% | 7.90% |
BB | 6.00% | 6.50% | 6.80% | 7.55% | 8.10% |
B | 7.00% | 7.50% | 8.80% | 9.55% | 10.10% |
CCC | 7.50% | 7.90% | 8.90% | 10.55% | 11.10% |
CC | 7.80% | 8.80% | 9.60% | 10.50% | 12.80% |
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Government Bond | 1.50% | 2.70% | 3.10% | 3.90% | 4.20% |