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Assume that the implied 1-year forward risk-free rate is 2.5%, and the expected 1-year forward rate is 6.0%. Calculate and interpret the probability of default (PD) of a debt security. A. 3.30%, reflecting the cumulative PD over the next two years. B. 3.30%, reflecting the PD in year 2 conditional on no default in year 1. C. 3.41%, reflecting the cumulative PD over the next two years. D. 3.41%, reflecting the PD in year 2 conditional on no default in year 1. |