The following represents two yield curves. Maturity Pure Discount Treasury Yields 1 year 3 percent 2 year 6 percent 20 year 12 percent B-rated Corporate Bond Yields (Pure Discount Bonds) 6 percent 10 percent 17 percent 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-pi) = 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 + if R) = (1+fR) 1.102 (1+fR)1 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 + if R) = (1 + fR) (1+fR)1 1.062 1.21 = 1.0909 1.03 1.03 Spread will be 14.15 - 9.09 = 5.06 17. What is the expected probability of default in year 2 of two-year maturity B-rated debt? A. 2.83 percent. B. 3.00 percent. C. 4.43 percent. D. 2.68 percent. E. 5.00 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 p2 = (1.0909) (1.1415) = 0.95557 probability of default = (1-p2) = 1 -0.9557 = 0.0443 18. What is the probability that two-year B-rated corporate debt will be fully repaid? A. 92.9 percent. B. 95.6 percent. C. 97.2 percent. D. 7.10 percent. E. 4.40 percent. The probability that the debt will be fully repaid: Cp = p p2 Cp (0.9717) (0.9557) = 0.9287 =