In a fixed income group, you are asked to assess the credit risk of a 7-year corporate

bond that provides a coupon of 4.8% per year payable semiannually and has a yield of

3.8% (continuous compounding). The yields for all maturities on risk-free bonds are

2.4% per year (continuous compounding). Assume that defaults can take place every

6 months (immediately before a coupon payment) and the recovery rate is 40%.

Assuming that the unconditional default probabilities are the same on each possible

default date. What is approximate default probability? What is the more accurate

default probability?