Suppose a three-year corporate bond provides a coupon of 7% per year payable semiannually and has a

Question:

Suppose a three-year corporate bond provides a of 7% per year payable semiannually and has a yield of 5% (expressed with semiannual compounding). The yields for all maturities on risk-free bonds is 4% per annum (expressed with semiannual compounding). Assume that defaults can take place every six months (immediately before a payment) and the recovery rate is 45%. Estimate the default probabilities assuming
a) the unconditional default probabilities are the same on each possible default date and
b) assuming that the default probabilities conditional on no earlier default are the same on each possible default date.
Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...