For questions 1 and 2, consider a bond that has a yield-to-maturity of 4% and a credit rating of BBB. Assume that the probability that the company will default on the bond during next year is 0.5% and that investors’ recovery rate upon default is 40%.

For questions 1 and 2, consider a bond that has a yield-to-maturity of 4% and a credit rating of BBB. Assume that the probability that the company will default on the bond during next year is 0.5% and that investors’ recovery rate upon default is 40%.

Suppose that the probability of default on this bond increases to 0.75% a year. Which of the following options is correct ?