Question
An $85M, one-year, zero-coupon, collateralized, risky loan provides a 1.49% expected return (based on the expected payoff rather than the promised payment). The collateral property
An $85M, one-year, zero-coupon, collateralized, risky loan provides a 1.49% expected return (based on the expected payoff rather than the promised payment). The collateral property is currently worth $100M and will be either $130M or $80M in one year with an equal probability (50%/50%). The risk-free rate is 1%. What is the implied dollar value of the default option for this risky debt?
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Fundamentals of Investments Valuation and Management
Authors: Bradford Jordan, Thomas Miller
7th edition
978-0078096785, 78096782, 978-0077861636, 77861639, 978-0078115660
