510.

Debt Valuation and Asset Variance

Brozik Corp. has a zero-coupon bond that matures in five years with a face value of $60,000. The current value of the companys assets is $57,000, and the standard deviation of its ROA is 50 percent per year. The risk-free rate is 6 percent per year, compounded continuously.

a) What is the value of a risk-free bond with the same face value and maturity as the current bond?

b) What is the value of a put option on the firms assets with a strike price equal to the face value of the debt? c) Using the answers from (a) and (b), what is the value of the firms debt?

d) Using the answers from (a) and (b), what is the continuously compounded yield on the companys debt?