Question
A risk-free investment offers an annual return of 5%. A risky investment has a yield to maturity of 12% and offers $80,000 in 3 years
A risk-free investment offers an annual return of 5%. A risky investment has a yield to maturity of 12% and offers $80,000 in 3 years with a 80% probability and it has a 20% probability of default, in which case it will pay only $50,000. Show your work for full credit. Correct answers without the corresponding work receive 0 marks.
2a. What is the expected cash flow from this risky investment?
2b. What is the expected return on this investment?
2c. What is the risk premium?
2c. What is the default premium?
Step by Step Solution
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Answer a The expected cash flow from the risky investment is 80000 x 80 50000 x 20 70000 b The expec...
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Engineering economy
Authors: Leland Blank, Anthony Tarquin
7th Edition
9781259027406, 0073376302, 1259027406, 978-0073376301
