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A Gentle Introduction to Default Risk and Counterparty Credit Modelling

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Figure

Figure 1: The sequential default process. The relationship 3 between cumulative and marginaldefault probabilities, is also illustrated.
Figure 2: Valuation of a risky zero-coupon bond with time to maturity T − t = 1, recovery rateR = 0.4, one-year risk-free discount factor equal to e−0.035 and one year default proba-bility of 5%.
Figure 3: Credit spread as function of the survival probability (Parameters: T − t = 2 years, R =0.4).
Table 1 and the above reasoning help us to get the general formula for pricinga risky coupon bond:
+7

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