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Calculate the term structure of default probabilities over three years using the following spot rates from the Treasury and corporate bond (pure discount) yield curves.

Calculate the term structure of default probabilities over three years using the following spot rates from the Treasury and corporate bond (pure discount) yield curves. Be sure to calculate both the annual marginal and the cumulative default probabilities.

Spot Spot Spot

yr 1 yr 2 yr 3

Treasury bonds 5.0% 6.2% 6.8%

BBB-rated bonds 7.0 8.0 9.0

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