Question 1 [26 Marks] You are given the following information on spot rates (i.e. zero coupon...

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Question 1 [26 Marks] You are given the following information on spot rates (i.e. zero coupon bonds) for different terms: Term (maturity) Defaults Recovery Term component Inflation per 1000 on default (annually compounded) 15222 0.50% 2.00% 10 3.50% 20 4.00% 6.00% 225 22 20 80% 2% 10 50% 2% 40% 2% 20 20% 2% 25 0% 2% a) Calculate the effective annual spot rate for each term including defaults and recovery. [10 Marks] b) Calculate the default component of the spot rate for each term. [6 Marks] c) Calculate the gross spot rate for each term including default and inflation [6 marks] d) State which type of yield curve to the gross spot rates form, and explain why. If the 1 year term component was 2.5%, what type of yield curve would the gross spot rates form and why? [4 Marks] Question 1 [26 Marks] You are given the following information on spot rates (i.e. zero coupon bonds) for different terms: Term (maturity) Defaults Recovery Term component Inflation per 1000 on default (annually compounded) 15222 0.50% 2.00% 10 3.50% 20 4.00% 6.00% 225 22 20 80% 2% 10 50% 2% 40% 2% 20 20% 2% 25 0% 2% a) Calculate the effective annual spot rate for each term including defaults and recovery. [10 Marks] b) Calculate the default component of the spot rate for each term. [6 Marks] c) Calculate the gross spot rate for each term including default and inflation [6 marks] d) State which type of yield curve to the gross spot rates form, and explain why. If the 1 year term component was 2.5%, what type of yield curve would the gross spot rates form and why? [4 Marks]