Single choice8)A securitys price, for example, the price of a credit risky bond, observed in the market is:A risk-neutral priceAn equilibrium priceAn arbitrage-free price
Question
Single choice8)A securitys price, for example, the price of a credit risky bond, observed in the market is:A risk-neutral priceAn equilibrium priceAn arbitrage-free price
Solution
The price of a security, such as a credit risky bond, observed in the market is an arbitrage-free price. This is because in an efficient market, the price of the security would already reflect all available information, including the risk associated with the bond. Therefore, there would be no opportunity for arbitrage, which is the practice of taking advantage of a price difference between two or more markets.
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