Q6.6 If continuously compounded risk-free rates and yields for A-rated corporate bonds were as given below how much an investor who holds a 5-year A-rated bond would be expected to lose as a result of defaults during the five years based on the yield spread between risk-free rates and corporate bond yields? Maturity (years) 1 2 3 4 5 Risk-free yield 5% 5% 5% 5% 5% Corporate bond yield 5.25% 5.50% 5.70% 5.85% 5.95% a) If a recovery rate for A-rated bonds was 55% what would be the unconditional 5-year default probability for such a bond based on risk-neutral default probabilities? b) What is its corresponding probability based on average historical default rates calculated over the 19702015 period (see Table shown in 26.6)? Q6.6 If continuously compounded risk-free rates and yields for A-rated corporate bonds were as given below how much an investor who holds a 5-year A-rated bond would be expected to lose as a result of defaults during the five years based on the yield spread between risk-free rates and corporate bond yields? Maturity (years) 1 2 3 4 5 Risk-free yield 5% 5% 5% 5% 5% Corporate bond yield 5.25% 5.50% 5.70% 5.85% 5.95% a) If a recovery rate for A-rated bonds was 55% what would be the unconditional 5-year default probability for such a bond based on risk-neutral default probabilities? b) What is its corresponding probability based on average historical default rates calculated over the 19702015 period (see Table shown in 26.6)