The Following Is Information on Current Spot and Forward Term

question 98

Multiple Choice

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually) : $$\begin{array} { | l | l | l | c | } \hline & \text { Spot 1 Year } & \text { Spot 2 Year } & \begin{array} { l } \text { (1-year maturity) } \\\text { Forward 1-year }\end{array} \\\hline \text { Treasury } & 3.0 \text { percent } & 4.75 \text { percent } & \mathrm { X } \\\hline \text { BBB Corporate Debt } & 7.5 \text { percent } & 9.15 \text { percent } & \mathrm { Y } \\\hline\end{array}$$
-Using the term structure of default probabilities, the implied default probability for BBB corporate debt during the current year is

• A)98.0 percent.
• B)2.35 percent.
• C)4.19 percent.
• D)3.90 percent.
• E)2.71 percent.

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