8. You are considering buying a risky bond. The bond has a $1,000 face value, a 2-year maturity, and a coupon rate of 5%. You believe the probability the company will survive to pay off the bond is 96%. You also believe there is a 4% probability the company will default within the first 2 months, in which case you will be able to recover 50% of the bonds face value at the end of year 2. The bond is selling for $900.

a. Calculate the expected return on this bond on an annual basis.

b. Use Goal Seek or Solver to determine the probability of survival that would yield an expected annual return of 8%.