Bond Rates 1year rate 2 year rate

T-bond 5 .15% pa 5.75% pa

C-bond 7.25% pa 8.55% pa

1.Calculate cumulative probability of default for two-year corporate bond assuming that the probability of full payment in year 1 is same as in year 2.

2. Calculate one-year forward rates for bonds.

3.Estimate the cumulative probability of corporate bond defaulting over the two year period (hint: use the forward rate in your calculation).