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A company is in financial distress and may later default on its bond. The company's stock and bond will pay no dividend or coupon in
A company is in financial distress and may later default on its bond. The company's stock and bond will pay no dividend or coupon in the future. Currently, the stock sells for $4. Its bond and stock prices in time T depend on whether or not the default occurs as follows:
Asset price in time T | ||
No default | Default | |
Bond | 100 | 80 |
Stock | 20 | 0 |
Consider a forward contract on the company's bond. The forward price on a contract we start today is $85. If there is no arbitrage, what is the current price of the bond?
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