Question
Grummon Corporation has issuedzero-coupon corporate bonds with afive-year maturity(assume $ 100 face valuebond). Investors believe there is a 20% chance that Grummon will default on
Grummon Corporation has issuedzero-coupon corporate bonds with afive-year maturity(assume $ 100 face valuebond). Investors believe there is a 20% chance that Grummon will default on these bonds. If Grummon doesdefault, investors expect to receive only 50 cents per dollar they are owed. If investors require a 6 % expected return on their investment in thesebonds, what will be the?
a. price of thesebonds? b. yield to maturity on thesebonds? Note: Assume annual compounding.
a. What will be the price of these bonds? The price of these bonds is $ (Round to the nearest cent.)
b. What will be the yield to maturity on these bonds, assuming the default does not materialize? The yield to maturity on these bonds is %. (Round to two decimal places.)
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