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A one year, pure discount, corporate bond has a face value of $100. If the economy is strong or average the issuer will remain solvent
A one year, pure discount, corporate bond has a face value of $100. If the economy is strong or average the issuer will remain solvent and redeem the bond. Unfortunately, if the economy becomes weak the issuer will default and bondholders will be able to recover only $88. All three states of the economy are equally likely. The risk-free rate is 2%. If the bond now sells for $90, what part of the promised 11.1% return is a) the expected yield? b) the expected loss rate? c) compensation for bearing systematic risk?
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