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Q5-RK wants to determine the present value of a zero-coupon bond with the following character- istics: The bond lasts for exactly one period and promises
Q5-RK wants to determine the present value of a zero-coupon bond with the following character- istics: The bond lasts for exactly one period and promises to pay $200 next period, the bond pays off 95% of the time and it is known to default completely 5% of the time. The bond has a beta of .25. 1. Assuming a risk-free rate of 6% and the expected rate of the return on the market being 10%, what does CAPM imply for the expected return on the bond? (5 pts.) 2. What would be the present value of the bond? (10 pts.) 3. Determine the promised or quoted rate of return for this bond. (10 pts.) 4. Decompose the promised rate of return on this bond and identify each element. (5 pts.) Q5-RK wants to determine the present value of a zero-coupon bond with the following character- istics: The bond lasts for exactly one period and promises to pay $200 next period, the bond pays off 95% of the time and it is known to default completely 5% of the time. The bond has a beta of .25. 1. Assuming a risk-free rate of 6% and the expected rate of the return on the market being 10%, what does CAPM imply for the expected return on the bond? (5 pts.) 2. What would be the present value of the bond? (10 pts.) 3. Determine the promised or quoted rate of return for this bond. (10 pts.) 4. Decompose the promised rate of return on this bond and identify each element. (5 pts.)
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