Discounting [48]

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Bullet points include: Suppose we have two ‘pay-offs’ (business opportunities, financial outcomes, ...), C and D With C, receive M if event X occurs (X has probability p, p > 0) With D, receive 2M if event X occurs Which do we prefer? D (if M > 0), C (if M < 0) To value a risky bond or claim we include a term like: Probability of default (‘PD’) x Loss Given Default (‘LGD’)

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