Question
Assume it is 11/16/2018. A corporate bond matures about one year (11/15/2019). Please ignore net present values and concentrate on values to be paid in
Assume it is 11/16/2018.A corporate bond matures about one year (11/15/2019). Please ignore net present values and concentrate on values to be paid in the future. In other words, even though a dollar to be received in a year is worth less than a dollar today, for the time being, let's just talk about the values at the time of maturity.The bond promises a single payment of interest of $65 paid at maturity as well as its principal (face value) of $1,000 at maturity. The bond has a 14% probability of default and payment under default (for everything - interest and principal) is $425. The investor buys the bond today (11/16/18) for $820.
1.What is the promised (contractual) yield to maturity on the Bond (simple annual compounding) for the investor when he/she buys the Bond on 11/16/18 based upon the purchase price and the Bond's terms?
2.What is the expected yield (simple annual compounding) to maturity for the investor when he/she buys this Bond?
3.Does it make sense to buy Credit Insurance at the same time you buy the Bond to insure (be made whole) against the risk of a credit default if the Bank (or insurance company) selling the credit-default insurance costs $160 for this Bond?Why or Why not?Is there any other piece of information that you would need to make an intelligent decision for this part of the question?
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