8010 Exam Dumps | If the default hazard rate for a company is 10%, and the spread on its bondsover the risk free rate is

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PRMIA.8010.v2022-06-27.q87
Question 43

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Question 43/87

If the default hazard rate for a company is 10%, and the spread on its bondsover the risk free rate is 800 bps, what is the expected recovery rate?

A. 40.00%

B. 20.00%

C. 8.00%

D. 0.00%

Correct Answer: B

Explanation
The recovery rate, the default hazard rate (also called the average default intensity) and the spread on debt arelinked by the equation Hazard Rate = Spread/(1 - Recovery Rate). Therefore, the recovery rate implicit in the given data is = 1 - 8%/10% = 20%.

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