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?
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Principles Of Financial Management
Authors: Haim Levy, Marshall Sarnat
1st Edition
0137097751, 978-0137097753
