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A company has issued three- and five-year bonds, each of which has a coupon of 4% per annum payable annually. The yields on the bonds
A company has issued three- and five-year bonds, each of which has a coupon of 4% per annum payable annually. The yields on the bonds (expressed with continuous compounding) are 4.5% and 4.75%, respectively. Risk-free interest rates are 3.5% with continuous compounding for all maturities. The recovery rate is 40%. Defaults can take place halfway through each year.The unconditional risk-neutral default rates per year are Q1 for years 1 to 3 and Q2 for years 4 and 5. Estimate Q1 and Q2.
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