Investors are evaluating two 6-year bonds at time t in an emerging financial crisis setting where

there is a strong likelihood of default. Assume the following values for the expected probability

of default (z) of the two bonds, issued respectively by companies A and B.

t+1 t+2 t+3 t+4 t+5 t+6

A 0.1 0.2 0.3 0.3 0.4 0.3

B 0 0.2 0.6 0.7 0.3 0.25

a. Assume both bonds are 6-year, 8% coupon, $1000 face value coupon bonds, each selling for

$1000. Calculate the yields on the two bonds. Which is higher?

b. Now assume a setting where all future interest rates are exogenously fixed at 6%; the prices

of the bond are now to be determined. What are the prices of bond A and B? Which is

higher?

c. With respect to (b) above, and taking both present value streams together, does there exist

some value for i that would make the price of Bond A equal to the price of Bond B?