Suppose firm X is rated as B by Moodys. They issue a three year bond, with annual payments and coupon rate of 7%, Face Value of $100 and price of $105. Use a recovery rate of 70%. Use Moodys default rate by rating found in the photo

(a) Is the bond selling at a premium or discount? (b) Write the equation you use to find the YTM.

(c) Make a tree analysis of the bond.

(d) Write the equation you use to find the Expected YTM.

Historical Average Marginal Default Rates and Bootstrapped Confidence Intervals from Time Horizon (Years) 10 Issuer Weighted Average (u) Aaa 0.00096 0.000% 0.00096 0.0279% 0.07596 0.0739% 0.0799% 0.084% 0.09096 0.097% 0.00896 0.011% 0.023% 0.064% 0.071% 0.082% 0.083% 0.073% 0.048% 0.059% 0.021% 0.0759% 0.126% 0.124% 0.129% 0.143% 0.146% 0.167% 0,182% 0.183% Baa 0.1829% 0.3279% 0.42696 0.5109% 0.51496 0.52496 0.521% 0.5099% 0.58896 0.649% 1.202% 2041% 2.425% 2.529% 2.453% 2.2569% 2.020% 1.984% 2.001% 2.094% 5.240% 6.408% 6.489% 6.050% 6.085% 5.718% 5.484% 4.919% 4.743% 4.097% Caa-C 19.488% 13,713% 13.271% 11,988% 10.840% 8.904% 7.321% 8426% 8.446% 9,069%