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Economics 330 –Money and Banking Fall 2014 Dr. Neri Problem Set 3 –Due within the first 5 minutes of lecture on Monday October 20, 2014. Late submissions and E-mail submissions will not be accepted. You must show your calculations. I. Suppose the interest rate for a 1-year $1000 Treasury bond is 1%. a. What will be the price and yield for a 1-year BB-rated corporate bond if the probability of default is 6 percent. b. What is the yield spread between the two bonds. $0 II. Suppose the interest rate for a 1-year Treasury bond is 10% and a 1-year BB-rated corporate bond is 15.8%. What is the probability of default as perceived by the market?