A company has issued one and twoyear bonds providing 8% coupons, payable annually. The yields on the
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A company has issued one‐ and two‐year bonds providing 8% coupons, payable annually. The yields on the bonds (expressed with continuous compounding) are 6.0% and 6.6%, respectively. Risk‐free rates are 4.5% for all maturities. The recovery rate is 35%. Defaults can take place halfway through each year. Estimate the risk‐neutral default rate each year.
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