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From the Treasury strip yield curve, the current required yields on one- and two-year Treasuries
are i
1
= 5.65 percent and i
2
= 6.50 percent, respectively. Further, the current yield curve indicates
that appropriate one-year discount bonds are yielding k
1
= 9.5 percent, and two-year bonds are
yielding k
2
= 11.25 percent.
a. Calculate the one-year forward rate on the Treasuries and the corporate bond.
b. Using the current and forward one-year rates, calculate the marginal probability of repayment
on the corporate bond in years 1 and 2, respectively.
c. Calculate the cumulative probability of default on the corporate bond over the next two years.
ned

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Treasury and Corporate Bond Yield Rates, Forward Rates, and Default Probabilities

  • 1. undefi From the Treasury strip yield curve, the current required yields on one- and two-year Treasuries are i 1 = 5.65 percent and i 2 = 6.50 percent, respectively. Further, the current yield curve indicates that appropriate one-year discount bonds are yielding k 1 = 9.5 percent, and two-year bonds are yielding k 2 = 11.25 percent. a. Calculate the one-year forward rate on the Treasuries and the corporate bond. b. Using the current and forward one-year rates, calculate the marginal probability of repayment on the corporate bond in years 1 and 2, respectively. c. Calculate the cumulative probability of default on the corporate bond over the next two years. ned