XYZ Corporation has issued a 5-year bond with a face value of $1,000 and a coupon rate of 6%. The bond pays interest semi-annually. Due to recent economic events, the credit quality of XYZ Corporation has weakened. To estimate the bond's default probability using a reduced form model, you gather the following data:
1. Current yield on similar bonds in the market: 7%.
2. Risk-free rate: 4%.
Using a reduced-form model, you seek to determine the implied credit spread and the probability of default over the life of the bond. Based on your calculations, which of the following statements about the probability of default and the bond pricing is correct?