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

Question: 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

A company has issued 2- and 3-year bonds with a of 4% per annum payable annually. The yields on the bonds (expressed with continuous are 4.5% and 4.75%, respectively. Risk-free rates are 3.5% with continuous 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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