Assume that a 2 year corporate bond pays a coupon of 6 % per annum semi annually and has a yield of 8%. The yield for all maturities on risk free bonds is 4% per annum (expressed with continuous compounding). Assume that defaults can take place every year (immediately before coupon payment) and the recovery rate is 50%.
Required
Estimate the default probabilities of the bond using an exact estimation assuming that the unconditional default probabilities are the same on each default date
Required
Estimate the default probabilities of the bond using an exact estimation assuming that the unconditional default probabilities are the same on each default date
