Question
Suppose a 3-year corporate bond provides a coupon of 7% per year payable semiannually and has a yield of 5%. The yields for all maturities
Suppose a 3-year corporate bond provides a coupon of 7% per year payable semiannually and has a yield of 5%. The yields for all maturities on risk free bonds are 4%
annualized. Assume that defaults can take place every 6 months (immediately before a coupon payment) and the recovery rate is 45%.
a. Estimate the default probability assuming the unconditional default probabilities are the same on each possible default rate.
b. Estimate the default probability assuming the default probabilities conditional on no earlier default are the same on each possible default date.
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