Question
A firm plans to liquidate in one year and use the proceeds to pay its bondholders and shareholders. The firms liquidation value has the following
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A firm plans to liquidate in one year and use the proceeds to pay its bondholders and shareholders. The firms liquidation value has the following possi- ble outcomes:
Payoff (in million $s) Probability $100 15%
$200 85% The firm has issued a bond that promises a payment next year of $150 million. The
expected rate of return on the bond is 6%.
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(a) What is the price of the bond?
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(b) What is the YTM of the bond? (State this in percent and give at least 2 decimal places of accuracy.)
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(c) What is the credit premium for the bond?
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New Issues In Financial And Credit Markets
Authors: Franco Fiordelisi , Philip Molyneux, Daniele Previati
1st Edition
0230275443, 978-0230275447
