***Answer as many questions as you can, thanks***

Question 1 (26 Marks] You are given the following information on spot rates (i.e. zero coupon bonds) for different terms: Term Term (maturity) component (annually compounded) Defaults per 1000 Recovery on default Inflation 0.50% 2.00% 3.50% 4.00% 6.00% 80% 50% 40% 20% 0% a) Calculate the effective annual spot rate for each term including defaults and recovery. [10 Marks] b) Calculate the default component of the spot rate for each term. [6 Marks] c) Calculate the gross spot rate for each term including default and inflation [6 marks] d) State which type of yield curve to the gross spot rates form, and explain why. If the 1 year term component was 2.5%, what type of yield curve would the gross spot rates form and why? [4 Marks) Question 1 (26 Marks] You are given the following information on spot rates (i.e. zero coupon bonds) for different terms: Term Term (maturity) component (annually compounded) Defaults per 1000 Recovery on default Inflation 0.50% 2.00% 3.50% 4.00% 6.00% 80% 50% 40% 20% 0% a) Calculate the effective annual spot rate for each term including defaults and recovery. [10 Marks] b) Calculate the default component of the spot rate for each term. [6 Marks] c) Calculate the gross spot rate for each term including default and inflation [6 marks] d) State which type of yield curve to the gross spot rates form, and explain why. If the 1 year term component was 2.5%, what type of yield curve would the gross spot rates form and why? [4 Marks)