Financial economics

A model was proposed for a country’s sovereign debt as follows:   The economy is in one of three states: 1 (good), 2 (bad) and 3 (default).  Transition intensities λi,j are constant and as follows:    λ1,2 = 1; λ1,3 = 0; λ2,1 = 0.25, λ2,3 = 0.75; λ3j = 0 for all j and λ1,1 = λ2,2 = −1.   It follows that if pi(t) is the probability that the economy is in state i at time t then:     )(25.0)()(211tptpdttdp+−=   and     )()()(212tptpdttdp−=.   Set h(t) = 2p1 (t) − p2(t).    (ii) (a) Show that ()1.5().dhthtdt=−    (b)  Derive a similar equation for k defined by k(t) = 2p1(t) + p2(t).     [2]   Suppose that this country’s economy is in state 2 at time 0.    (iii)       Find the probability that it is in default at time 2. [4]  Assume a continuously compounded risk-free interest rate of 2% per annum and  a recovery rate of 60%.   (iv)   (a)  Deduce the price under this model for a zero-coupon bond in this country with a redemption value of 100 and a redemption date in two years’ time.     (b)  Calculate the credit spread.     [3]     [Total 

The post Financial economics appeared first on Essay Bishops.

Order a unique copy of this paper
(550 words)

Approximate price: $22

Basic Guarantees
  • Free title page and bibliography
  • Free unlimited revisions
  • Plagiarism-free papers
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Progressive delivery
  • Plagiarism report
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double or single line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Writing quality papers is a TOP priority. One expert takes one order at a time.
The service package includes topic brainstorm, research, drafting, proofreading, plagiarism check, citation formatting, and revisions.

Money-back guarantee

We appreciate how valuable your time is. Hence, we make sure all custom papers are 100% original and delivered within the agreed time frame

Read more

Zero-plagiarism guarantee

Each paper is written from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

We see it as our duty to follow all instruction the client provides. If you feel the completed paper does not meet your exact requirements, we will revise the paper if you let us know about the problem within 14 business days from the date of delivery.

Read more

Privacy policy

Your email is safe, we use your personal data for legal purposes only and in accordance with personal data protection law. Your payment details are also secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

You can easily contact us with any question or issues you need to be addressed. Also, you have the opportunity to communicate directly with assigned writer, e-mail us, submit revision requests, chat with us online, or call our toll-free on our site. We are always available to our customers.

Read more

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
The price is based on these factors:
Academic level
Number of pages