Guringai Bank has made a one-year loan to Hornsby Panelbeaters Ltd, a firm that\ manufactures toy blocks. The estimated probability of default of this loan is

9.4%

.\ The bank has also made a two-year loan to Hornsby Panelbeaters Ltd that provides\ a return of

13.3%

per annum if the loan is not defaulted. And the bank will lose all\ the claims on principal and interests upon loan default. The yield is

2%

per annum\ for the 1-year maturity government bond. Based on the prices of 1-year and 2-year\ maturity government bond prices, the forward rate for the 2 nd year is

4%

per\ annum.\ What is the cumulative probability of repayment (i.e. not default) of Hornsby\ Panelbeaters Ltd over the two years?\ (Please round your answer to at least 3 decimal places in decimal points, not\ percentage terms.)\ Answer:

Guringai Bank has made a one-year loan to Hornsby Panelbeaters Ltd, a firm that manufactures toy blocks. The estimated probability of default of this loan is 9.4%. The bank has also made a two-year loan to Hornsby Panelbeaters Ltd that provides a return of 13.3% per annum if the loan is not defaulted. And the bank will lose all the claims on principal and interests upon loan default. The yield is 2% per annum for the 1-year maturity government bond. Based on the prices of 1-year and 2-year maturity government bond prices, the forward rate for the 2 nd year is 4% per annum. What is the cumulative probability of repayment (i.e. not default) of Hornsby Panelbeaters Ltd over the two years? (Please round your answer to at least 3 decimal places in decimal points, not percentage terms.)