If a company's five year credit spread is 200 basis points and the recovery rate in the event of a default is estimated to be 20% what is the average hazard rate per year over the five years
A. 0.4%
B. 1.2%
C. 1.8%
D. 2.5%
D
The average hazard rate is the credit spread divided by one minus the recovery rate. In this case we get 0.02/0.8=0.025 or 2.5%
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