Estimate q1 and q2, The recovery rate is 40%. Defaults can

Estimate q1 and q2

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Reference no: EM131239670

A company has issued 3- and 5-year bonds with a coupon of 4% per annum payable annually. The yields on the bonds (expressed with continuous compounding) are 4.5% and 4.75%, respectively. Risk-free rates are 3.5% with continuous compounding for all maturities.

The recovery rate is 40%. Defaults can take place halfway through each year. The risk-neutral default rates per year are Q₁ for years 1 to 3 and Q₂ for years 4 and 5. Estimate Q₁ and Q₂.

Reference no: EM131239670

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