A company has a zero-coupon bond outstanding, with face value 1000 and a 2 year maturity. The bond is risky but bears no systematic risk. There are two equally likely scenarios at maturity: in the first the bond will be fully repaid so the bankruptcy costs are zero, in the second the company will be bankrupt and the bondholder will receive 700 less the bankruptcy costs. The risk free interest rate is 5% and the market value of the bond is 720.

What is the expected value of the bankruptcy costs born by bond holders?

(a) 112.40 (b) 84.10 (c) 74.12 (d) 56.20 (e) I choose not to answer.

The answer is D. but I think the right answer should be A. Could you please help me. Thank you.