Question
1.Assume perfect markets. A $1000 zero-coupon corporate bond with one year to maturity will default with 20% probability.If it does, investors receive only 60% of
1.Assume perfect markets. A $1000 zero-coupon corporate bond with one year to maturity will default with 20% probability.If it does, investors receive only 60% of what is due to them.This bond sells for $804.64. The risk-free rate is 3% per annum and the return on the overall market is 8.75% per annum.
a.What is the beta of this bond?
b.Find the promised rate of return and decompose it into the time premium, risk premium and default premium.
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Survey Of Economics, Principles, Applications, And Tools
Authors: Arthur O'Sullivan, Steven M. Sheffrin, Stephen J. Perez
5th Edition
0132556073, 978-0132556071
