The Current One-Year and Two-Year Zero-Coupon Rates Are 6% and 7%,respectively.The

Multiple Choice

The current one-year and two-year zero-coupon rates are 6% and 7%,respectively.The one-year and two-year credit spreads are 1% and 2%,respectively.If the recovery rates on this class of bonds is 40% of face value,which of the following numbers most closely approximates the forward probability of default in year 2? Assume that interest rates and yields are in continuously-compounded and annualized terms.Assume also that if default occurs in any year,the recovered amount is received at the end of that year.

A) 1%
B) 2%
C) 5%
D) 9%