Microsoft Word - PS3_042916 A local radio station issues a one-year zero-coupon bond. The face value is
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Question:
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 8%. The appropriate discount rate (taking into account the risk of the investment) is 1.5%. (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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