The following represents two yield curves. Maturity Pure Discount Treasury Yields 1 year 3 percent 2 year 6 percent 12 percent B-rated Corporate Bond Yields (Pure Discount Bonds) 6 percent 10 percent 17 percent 20 year 14. What is the implied probability of repayment on one-year B-rated debt? A. 95.00 percent. B. 97.17 percent. C. 94.00 percent. D. 97.00 percent. E. 97.09 percent. p(1+k)=(1+i) p = (1 + i)(1 + k) where p = probability of full repayment k interest rate on corporate debt i = interest rate on Treasury p1 = (1.03) (1.06) = 0.9717 probability of default = (1 - p) = 1 0.9717 = 0.0283 15. What interest rate is expected on a one-year B-rated corporate bond in one year? (Hint: Use the implied forward rate.) A. 10.0 percent. B. 9.09 percent. C. 14.15 percent. D. 12.0 percent. E. 17.0 percent. (1+ifR): = (1 + FR) (1+fR) 1.10 == 1.06 1.21 1.06 = 1.1415 16. What spread is expected between the one-year maturity B-rated bond and the one-year Treasury bond in one year? A. 3.00 percent. B. 5.06 percent. C. 4.00 percent. D. 5.00 percent. E. 7.00 percent. (1 + FR) 1.062 (1 + if R) == = (1+ FR) 1.03 1.21 1.03 = 1.0909 Spread will be 14.159.09 = 5.06