Interest

Hazard rate Time

Survival probaDefault probab

Discount rate
0
6
12
18
24
30
36
42
48
54
60

1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

1.00
0.98
0.95
0.93
0.91
0.88
0.86
0.84
0.82
0.80
0.78

0.05

1yr bond: c =
5%, R= 10%
Coupon+Face

5
105

Recovery

Discounted Expected value

d(0,t)*(q(t)*c + (1-q(t))*R)
10
10

Model Price
True Price
Error
Sum Error

4.88
99.94

104.82
100.92
15.17
1279.89
100.92

2yr bond: c =
8%, R= 25%
Coupon+Face

Recovery

2
2
2
102

Discounted Expected value

d(0,t)*(q(t)*c + (1-q(t))*R)
25
25
25
25

1.95
1.90
1.86
92.41

Model Price
True Price
Error

98.12
91.56
43.08

True Price

91.56

3yr bond:
c = 5%,
R= 50%
Coupon+Fa

5
5
5
5
5
105

Recovery

Discounted Expected value

d(0,t)*(q(t)*c + (1-q(t))*R)
50
50
50
50
50
50

4.88
4.76
4.64
4.53
4.42
90.54

4yr bond:
c = 5%,
R=10%
Coupon+Fa
Recovery

5
5
5
5
5
5
5
105

10
10
10
10
10
10
10
10

Model Price
True Price
Error

113.77
105.60
66.70

Model Price
True Price
Error

True Price

105.60

True Price

Discounted Expected value

d(0,t)*(q(t)*c + (1-q(t))*R)
4.88
4.76
4.64
4.53
4.42
4.31
4.21
86.18

117.93
98.90
361.84

98.90

5yr bond:
c=10%,
R=20%
Coupon+Fa
Recovery

10
10
10
10
10
10
10
10
10
110

Discounted Expected value

d(0,t)*(q(t)*c + (1-q(t))*R)
20
20
20
20
20
20
20
20
20
20

Model Price
True Price
Error

9.76
9.52
9.29
9.06
8.84
8.62
8.41
8.21
8.01
85.93
165.64
137.48
793.10

137.48

iscounted Expected value

(0,t)*(q(t)*c + (1-q(t))*R)