1. Suppose you have a one-year corporate bond that provides a coupon of r = 5%. However, the company is in trouble and might default, in case of which you do not receive anything back. Assume that the bond exhibits a yield to maturity of y=20%.

(a) What is the current price of the bond Po?

(b) If interest rates are i= 10%, what is the expected cash flow Eo [CF1]?

(c) What is the probability of default p?

2. Suppose you have a two-year annual corporate bond that provides a coupon rate of c = 6%. Assume that the bond has a yield to maturity of y=20%

i. What is the current price of the bond, Po?

ii. The company is in trouble and might default. In case of default you would not receive anything back two years from now. Assume that the coupon payment one year from now is safe. If interest rates are i= 10%, what is the expected cash flow Eo [CF2]?

iii. What is the probability of default p at time t = 2?

iv. How much would it cost to insure this bond against default (assuming efficient mar- kets)?

1. (M)* Suppose you have a one-year corporate bond that provides a coupon of r=5%. However, the company is in trouble and might default, in case of which you do not receive anything back. Assume that the bond exhibits a yield to maturity of y=20%. (a) What is the current price of the bond P0 ? (b) If interest rates are i=10%, what is the expected cash flow E0[CF1] ? (c) What is the probability of default p ? 2. (EX)* Debt Financing (Answer all parts of this question.) (a) What is a "Corporate Bond"? Give a short explanation. (b) What is a "Credit Default Swap"? Give a short explanation. (c) What are "Rating Agencies", and what is their role? (d) Suppose you have a two-year annual corporate bond that provides a coupon rate of c=6%. Assume that the bond has a yield to maturity of y=20%. i. What is the current price of the bond, P0 ? ii. The company is in trouble and might default. In case of default you would not receive anything back two years from now. Assume that the coupon payment one year from now is safe. If interest rates are i=10%, what is the expected cash flow E0[CF2] ? iii. What is the probability of default p at time t=2 ? iv. How much would it cost to insure this bond against default (assuming efficient markets)