Question
Suppose that people only care about the expected values of returns of their investment. United Airlines (UA) has issued bonds. Participants of the financial market
Suppose that people only care about the expected values of returns of their investment. United Airlines (UA) has issued bonds. Participants of the financial market believe that there is a chance UA will totally default on its bonds. Todays market price of a one-year discount UA bond with a face value of $1,000 is $840. Todays yield on one-year zero-coupon U.S. Treasury bonds is 1%. a. Calculate the difference between yields on this UA bond and this Treasury bond. What is the difference called? b. Calculate the investors perceived probability that UA will default
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