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Question 3 Consider a corporate bond rated A , with 7 years to maturity, face value $ 1 , 0 0 0 ,
Question Consider a corporate bond rated A with years to maturity, face value $ annual coupon rate of and semiannual coupon payments. The default probability is constant over the bond's life, and equal to per semester. When the corporation defaults, bondholders receive $ at the time of default. The fair interest rate to discount the bond's cash flows is per semester. a What is the fair price of the corporate bond? b What is the fair yieldtomaturity of the corporate bond? c What is the expected fair price one semester in the future? And what is the expected coupon payment one semester in the future? d What is the expected holding period for buying the bond for its fair price today and selling it for its expected fair price one semester ahead?
Question
Consider a corporate bond rated A with years to maturity, face value $ annual coupon
rate of and semiannual coupon payments. The default probability is constant over the bond's
life, and equal to per semester. When the corporation defaults, bondholders receive $ at
the time of default. The fair interest rate to discount the bond's cash flows is per semester.
a What is the fair price of the corporate bond?
b What is the fair yieldtomaturity of the corporate bond?
c What is the expected fair price one semester in the future? And what is the expected coupon
payment one semester in the future?
d What is the expected holding period for buying the bond for its fair price today and selling it
for its expected fair price one semester ahead?
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