QUESTION 7

1. Question 7 to 10 are based on the following information on two yield curves.

   Maturity	Annualized Yield of zero-coupon Treasury	Annualized Yield of B-rated Corporate Bond (zero-coupon)
   1 year	3 percent	6 percent
   2 year	6 percent	10 percent
   20 year	12 percent	17 percent

   What is the implied probability of repayment on the one-year B-rated debt (i.e., in the first year)?

   	A.	95.00 percent.
   	B.	97.17 percent.
   	C.	94.00 percent.
   	D.	97.00 percent.
   	E.	97.09 percent.

10 points

QUESTION 8

1. What interest rate is expected on a one-year B-rated corporate bond in the second year? (Hint: Use the implied forward rate formula)

   	A.	10.0 percent.
   	B.	9.09 percent.
   	C.	14.15 percent.
   	D.	12.0 percent.
   	E.	17.0 percent.

10 points

QUESTION 9

1. What is the conditional probability of default in the second year for the two-year maturity B-rated debt?

   	A.	2.83 percent.
   	B.	3.00 percent.
   	C.	4.43 percent.
   	D.	2.68 percent.
   	E.	5.00 percent.

10 points

QUESTION 10

1. What is the cumulative probability that two-year B-rated corporate debt will be fully repaid in the first two years?

   	A.	92.9 percent.
   	B.	95.6 percent.
   	C.	97.2 percent.
   	D.	7.10 percent.
   	E.	4.40 percent.