What kinds of risk premiums do we see today for bonds of different ratings?f
A good approximation for the risk-neutral default intensity per year for a bond is
where y is the bond’s yield, r is the yield on a risk-free bond promising the same cash
flows as the bond, and R is the recovery rate. In applying equation (1) we used the Merrill
Lynch bond indices. These indices report the yield on U.S. dollar denominated corporate
bonds with different credit ratings at the end of each month.
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