Question
Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company
Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of 1,000, 12 years to maturity, and a coupon rate of 8 percent paid annuallly. If the yield to maturity is 9 percent, what is the current price of the bond? Now the key difference is that every period, the firm may default with a probability of p = 0.02. Assume that in case of default the bond holders do not get anything. In reality, it is not actually this. The yield to maturity is a function of the bond's default risk and should change. But for our question, we will keep the YTM at the same value 9%.
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