Question: A company has issued 2 and 3 year bonds with a

A company has issued 2- and 3-year bonds with a coupon of 4% per annum payable annually. The yields on the bonds (expressed with continuous compounding) are 4.5% and 4.75%, respectively. Risk-free rates are 3.5% with continuous compounding for all maturities. The recovery rate is 40%. Defaults can take place half way through each year (which means defaults can only happen at the end of June every year). The risk-neutral default probability per year is Q1 for year 1 to 2 and Q2 for year 3. Estimate Q1 and Q2.

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