Question
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:
- $975
- $200
- $950
- $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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