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d. A local radio station issues a one-year zero-coupon bond. The face value is 1,000. You believe that the probability of bankruptcy is 4%. If
d. A local radio station issues a one-year zero-coupon bond. The face value is 1,000. You believe that the probability of bankruptcy is 4%. If the company goes bankrupt investors will receive 50 cents per dollar owed. The appropriate discount rate (taking into account the risk of the investment) is 2%.
(i) What is the price of the bond? (ii) What is the yield to maturity of the bond? (iii) If the 1-year risk-free rate is 1%, what is the yield spread?
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