Question: From the Treasury strip yield curve, the current required yields on one- and two-year Treasuries are i 1 = 5 percent and i 2 =

From the Treasury strip yield curve, the current required yields on one- and two-year Treasuries are i₁ = 5 percent and i₂ = 6.1 percent, respectively. Further, the current yield curve indicates that appropriate one-year discount bonds are yielding k₁ = 7 percent, and two-year bonds are yielding k₂ = 8.20 percent.

(1) Using the current and forward one-year rates, calculate the marginal probability of default on the corporate bond in year 1.

(2) Using the current and forward one-year rates, calculate the marginal probability of default on the corporate bond in year 2.

(3) Calculate the cumulative probability of default on the corporate bond over the next two years.

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