A firm has issued bonds with a remaining maturity of 1 year, face value of $100 and an annual coupon rate of 5% (there is only one coupon payment left, to be paid one year from now). You observe that the price of the bonds is $94.

(i)What is the yield on the bonds today?

Suppose that investors expect a 4% return on other bonds with similar maturity and risk and forecast that if the bond defaults, bond holders will get paid 70% of the coupon payments and principal value they are owed (i.e., a 70% recovery rate).

(ii)What is the expected cash flow of the bonds at time 1?

What is the probability of default implied by current bond prices?