The 3-year and 4-year asset swaps for a company have spreads of 100 and 125 basis, respectively, for contracts with annual payments, respectively. The underlying bonds entail a coupon of 4% per annum, payable annually. The term structure of interest rates is flat at 2.5% with continuous compounding. The recovery rate is 40%. Defaults can take place halfway through each year. The unconditional risk-neutral default probability is q₁ in years 1 to 3 and q₂ in year 4.

Question：Estimate q₁ and q₂.

Answer rating: 100% (QA)

ANS WER q 1 0 00 65 and q 2 0 00 75 WORK ING P V 3 Year Asset Swap PV B ond Spread P V B PV ... View the full answer