The Following Is Information on Current Spot and Forward Term

question 87

Multiple Choice

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

• A)99.84 percent.
• B)92.10 percent.
• C)4.45 percent.
• D)95.70 percent.
• E)7.90 percent.

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