1.Which of the following statements is TRUE?
A. Risk-neutral default probabilities can be calculated from CDS spreads.
B. Default rates (recovery rates) are negatively (positively) correlated with real economy activity over the business cycle.
C. According to Merton’s model, a firm’s equity can be viewed as a call option on the company’s assets.
D. All of the above.
2.The spread between the yield on a 3-year corporate bond and the yield on a similar risk-free bond is 50 basis points. The loss given default is 60%. What is the average hazard rate per year over the 3-year period?
A. 0.62%
B. 0.83%
C. 0.97%
D. 1.25%