Assumes perfect markets and risk neutrality. A $1000 zero-coupon corporate bond with one year to maturity will

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Assumes perfect markets and risk neutrality. A $1000 zero-coupon corporate bond with one year to maturity will default with 20% probability. If it does, investors receive $300. The rate of return on a 1-year U.S. Treasury is 3% per annum.

What is the price of this bond today?
What is the promised rate of return of this bond?
Decompose the promised rate of return into the time premium and default premium.

Posted Date: Jun 25, 2024 04:40 PM

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Assumes perfect markets and risk neutrality. A $1000 zero-coupon corporate bond with one year to maturity will

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