Question
A firm has issued a bond that promises a single payment of $1000 one year from now. The bond currently trades at $850. There is
A firm has issued a bond that promises a single payment of $1000 one year from now. The bond currently trades at $850. There is an 80% chance that the firm will be able to make the promised payment in full and a 20% chance that it will default, in which case bond holders will be able to recover 60% of the promised amount. What is the bond's promised yield and expected return? (Assume annual compounding)
[Hint: You need promised and expected payments for the the promised yield and expected return respectively]
(i) 17.5%; (ii) 17.5% (i) 12.63%; (ii) 7.45% (i) 17.5%; (ii) 8.24% (i) 8.24%; (ii) 17.5%
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