The following represents two yield curves.
$\begin{array} { | l r r | }
\hline \text { Maturity } & \text { Pure Discount Treasury Yields } & \text { B-rated Carparate Band } \
\hline & & \text { Yields (Pure Discaun Bonds) } \

1 \text { year } & 3 \text { percent } & 6\text { percent }\
2 \text { year } & 6 \text { percent }& 10 \text { percent } \
20 \text { year } & 12 \text { percent }& 17 \text { percent } \
\hline
\end{array}$
-What is the probability that two-year B-rated corporate debt will be fully repaid?

Question

The following represents two yield curves.
 $\begin{array} { | l r r | } 
\hline \text { Maturity } & \text { Pure  Discount Treasury Yields } & \text { B-rated Carparate Band } \
\hline  & & \text { Yields (Pure Discaun Bonds) } \

1 \text { year  } & 3 \text { percent } & 6\text { percent }\
2 \text { year  } & 6 \text { percent }& 10 \text { percent } \
20 \text { year } & 12 \text { percent }& 17 \text { percent } \
\hline
\end{array}$
-What is the probability that two-year B-rated corporate debt will be fully repaid?

Quizplus · Accepted Answer

The probability that the debt will be fully repaid: Cp = pS1U1B11S1U1B0 x pS1U1B12S1U1B0
Cp = (0.9717) x (0.9557) = 0.9287. The probability of repayment can be estimated using the formula: Probability = (1 + Treasury Yield) / (1 + Corporate Yield). For the two-year B-rated corporate debt: Probability = (1 + 0.06) / (1 + 0.10) = 0.929 or 92.9 percent.

The Following Represents Two Yield Curves -What Is the Probability That Two-Year B-Rated Corporate Debt Will