Question: Consider a firm whose 1-year zero-coupon bonds currently yield 5.8% and 2-year zero-coupon bonds yield 11.1%. The Treasury yield on 1-year zero-coupon bonds is 5.2%

Consider a firm whose 1-year zero-coupon bonds currently yield 5.8% and 2-year zero-coupon bonds yield 11.1%. The Treasury yield on 1-year zero-coupon bonds is 5.2% and 2-year zero-coupon bonds is 7.4%. Assume that the recovery rate is zero and that all rates are annualized assuming periodicity of 1 (i.e., annual compounding). What is the firm's marginal probability of default from year 1 to year 2 (1-P₂)?

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