Question
Suppose a three-year corporate bond provides a coupon of 7% per year payable semiannually and has a yield of 5% (expressed with semiannual compounding). The
Suppose a three-year corporate bond provides a coupon of 7% per year payable semiannually and has a yield of 5% (expressed with semiannual compounding). The yields for all maturities on risk-free bonds is 4% per annum (expressed with semiannual compounding). Assume that defaults can take place every six months (immediately before a coupon payment) and the recovery rate is 45%. Estimate the hazard rate (assumed constant) for the three years. Assume that the probability of default immediately before a coupon payment is the default probability given by the hazard rate for the previous six months.
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