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6. A zero-coupon corporate bond has a face value of $1000 and matures in 1 year. If the yield on government treasuries of the same

6. A zero-coupon corporate bond has a face value of $1000 and matures in 1 year.

If the yield on government treasuries of the same maturity is 5%, which of the following arepossibleprices for the corporate bond?

(As a technical assumption, the corporate bond is issued by an industrial company with generally cyclical cash flows and not some unusual special purpose entity.)

Select all that apply:

  1. $975
  2. $200
  3. $950
  4. $1000

7.A bond matures in one year and has a face value of $1,000 which it will pay with a probability of 90% in one year. With a probability of 10%, the bond will default, and the bondholders will only receive $200. (There are no interim coupon payments.) The bond is currently selling for $840.

(Answer any percentage questions as a decimal.)

Part A

What is thepromised returnon the bond? (i.e. the return if the bond pays it's $1,000 face value as promised.)

Part B

What is theexpected returnon the bond?

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