Question: Assume an IBM zero-coupon bond maturing in 1 year is trading at price of $982.80. Further assume the risk premium is 40% and the risk free rate is 1.3%.
a) If the market is assuming a recovery rate of 50% should IBM default, what is the approximate probability of default?
b) Assuming no change in the probability of default from a) immediately above, what is the implied recovery rate if the bonds are trading at a price of $982.32?