Question
A company has issued 2-, 3-, 4-, and 5-year bonds, each of which has a par value of $100 and a coupon of 6% per
A company has issued 2-, 3-, 4-, and 5-year bonds, each of which has a par value of $100 and a coupon of 6% per annum (paid semi-annually). The yields on the bonds (continuously compounded) are 2%, 3%, 4%, and 5%, respectively. The risk-free interest rate is flat at 2% (compounded continuously) across all maturities. The recovery rate is 36%. Defaults can take place in the middle of each year (immediately before the coupon payment dates). The annual unconditional risk-neutral default rates are Q1 for years 1 to 2, Q2 in year 3, Q3 in year 4, and Q4 in year 5. What are Q1, Q2, Q3, and Q4?
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