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(6) Food Motor Company issues a 10-year zero-coupon bond selling at 500, which is 50% of the par value. Investors currently expect to receive 75%
(6) Food Motor Company issues a 10-year zero-coupon bond selling at 500, which is 50% of the par value. Investors currently expect to receive 75% of the face value at maturity of the bond. (a) What is the expected rate of return for an investor to hold the bond until maturity? 16) What is the default premium? Explain your answer. (c) After one year, suppose now that investors believe that the bond will pay off only 50% of face value at maturity and investors still demand the same expected rate of return as in (a). What is the promised yield to maturity for another new investor to buy and hold the bond until maturity? (6) Food Motor Company issues a 10-year zero-coupon bond selling at 500, which is 50% of the par value. Investors currently expect to receive 75% of the face value at maturity of the bond. (a) What is the expected rate of return for an investor to hold the bond until maturity? 16) What is the default premium? Explain your answer. (c) After one year, suppose now that investors believe that the bond will pay off only 50% of face value at maturity and investors still demand the same expected rate of return as in (a). What is the promised yield to maturity for another new investor to buy and hold the bond until maturity
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