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Short Term Inc. has issued zero-coupon bonds that mature in one year. The returns from holding these bonds have a beta of 0.25. There is
Short Term Inc. has issued zero-coupon bonds that mature in one year. The returns from holding these bonds have a beta of 0.25. There is a chance of 70% that the bonds will pay full value, and a chance of 30% that they will only be worth 60 cents for each dollar of face value.Assume that the CAPM holds, that the risk-less rate is 5% and that the expected return on the market is 15%.
1. What is the current price of the bonds per $100 face value?
2. What is the YTM of the bonds?
3. What is the expected return of the bonds?
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