medium · Frm Part 2 Credit Risk
A CDS curve for a distressed obligor is currently inverted, with the 1-year spread at 1,200 bp and the 5-year spread at 800 bp.
Using the reduced-form modeling framework, what is the market's expectation?
- The firm's asset volatility is expected to increase over the next five years
- The recovery rate is expected to be higher for long-term debt
- The hazard rate is expected to fall if the firm survives the near-term crisis
- The credit risk premium is higher for long-term investors
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