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You are given the following information on spot rates (i.e. zero coupon bonds) for different terms: Term (maturity) Defaults Recovery Term component Inflation per
You are given the following information on spot rates (i.e. zero coupon bonds) for different terms: Term (maturity) Defaults Recovery Term component Inflation per 1000 on default (annually compounded) 1 0.50% 5 2.00% 25 222 3.50% 4.00% 6.00% 22522 20 80% 2% 10 50% 2% 40% 2% 20 20% 2% 0% 2% a) Calculate the effective annual spot rate for each term including defaults and recovery. [10 Marks] b) Calculate the default component of the spot rate for each term. [6 Marks] c) Calculate the gross spot rate for each term including default and inflation [6 marks] d) State which type of yield curve to the gross spot rates form, and explain why. If the 1 year term component was 2.5%, what type of yield curve would the gross spot rates form and why? [4 Marks]
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