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1. The table shows the historical cumulative probabilities for corporate bonds with B quality ratings: Cumulative Probabilities (%) Year 1 2 3 4 5 B

1. The table shows the historical cumulative probabilities for corporate bonds with B quality ratings:

Cumulative Probabilities (%) Year 1 2 3 4 5

B 6% 13% 20% 28% 36%

a. Determine the conditional default probabilities from the cumulative probabilities shown in the table.

What is the relation between conditional probabilities and credit spreads?

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