Question 2 The investment department of your bank is analysing the credit risk of the Beer Turn Company's (BTC) bonds over the next two years. The following table shows the expected return on the BTC bonds and the government bond with similar characteristics. One year rate (%) Two Year rate (*) 8.50 8.75 Gov't bond Beer Tum Company bond Spread (nisk premium) 11.00 12.50 12.50 3.75 a Your bank is willing to invest in any debt instrument with a probability of repayment greater than 97 75%. Should the BTC bond be bought and held over two years (assume no cash payments in the event of default)? (3 marks) b The risk manager thinks that the recovery rate on the bond is expected to be 70% in the event of default and is interested in holding the bond for one year Should the bond be purchased? Justify your decision (4 marks)