1. You own a 5-year corporate bond that pays 7% in annual coupon paid semi-annually. The current yield on this bond is 5%, also expressed in semi-annual compounding. The zero curve is currently flat at 4% per annum again expressed in semi-annual compounding. Suppose defaults can only take place every six months (right before a coupon payment) and that the recovery rate is 45%. - a) Estimate the default probabilities assuming the unconditional default probabilities are the same on each possible default date. b) Estimate the default probabilities assuming that the default probabilities conditional on no earlier default are the same on each possible default date. [Hint: If we assume that Q* is the default probability conditional on no earlier default. The unconditional default probabilities in 0.5, 1.0, 1.5, 2.0, 2.5, 3.0, ... years will be Q',Q'(1-Q), Q*(1Q*), Q*(1-Q*), Q*(1-Q*)*, Q*(1Q*)...]