A four-year corporate bond provides a coupon of 4% per year payable semiannually and has a yield of 5% expressed with continuous compounding. The risk-free yield curve is flat at 3% with continuous compounding. Assume that defaults can take place at the end of each year (immediately before a coupon or principal payment) and the recovery rate is 30%. Estimate the risk-neutral default probability on the assumption that it is the same each year using the approach in Table 16.3.

AppendixLO1