The following table summarises yields for T-bonds and C-bonds respectively (do the calculations for four decimal places).
Bond Rates 1 year rate 2-year rate
T-bond 5.15% pa 5.75% pa
C-bond 7.25% pa 8.55% pa
3.1. Calculate cumulative probability of default for two-year corporate bond assuming that the probability of full payment in year 1 is same as in year 2.
3.2 Calculate one-year forward rates for bonds.
3.3. Estimate the cumulative probability of corporate bond defaulting over the two year period (hint: use the forward rate in your calculation)

Answer rating: 100% (QA)

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