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Yield Curve for the Questions 6-9 Yield Corporate Bond 12% 9% Government Bond 8 % 6% Year 1 Year 2 Maturity 6. Calculate the probability

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Yield Curve for the Questions 6-9 Yield Corporate Bond 12% 9% Government Bond 8 % 6% Year 1 Year 2 Maturity 6. Calculate the probability of marginal default for the bond in year 1 a. 0.97 b. 0.98 c. 0.03 d. 0.02 None above e. 7. Calculate the probability of cumulative default for the bond in year 2 a. 0.9377 b. 0.0357 c. 0.0622 d. 0.0300 e. None above 8. Calculate the marginal probability of default in year 2 a. 0.9565 b. 0.0400 c. 0.0357 d. 0.0434 e. None above 9. How to read the figure above? a. We hold 2-year corporate bonds, we receive interest of 9% in year 1 and 12% in year2 b. We hold 2-year government bonds, we receive interest of 8% per-year for two year c. We hold 2-year government bonds, we receive interest rates of 8% in year 1 and 9% in year 2, which is the expected interest rate in year 2. d. We can buy a one year corporate bond and short one year government bond to arbitrage the situation above None above e

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