Suppose that the interest rate on a one-year risk-free bonds is 4%, and now a corporate bond is issued with a face value of 1,000, maturing in 1-year. The payoff in the case that the company doesnt default is 1060 with probability 80%, and 20% for the default case where bond holders receive nothing. With this chance in default, investors demand a 5% risk premium, which can be seen priced into the market.

A . What is the price of the bond, and what is its promised yield? Provide answers up to 2 decimal figures.

B. What is a recovery rate and how will the price of the bond change with a recovery rate of 40%.

C. You are worried about the risk of default on your bond investments. Do you buy or sell the credit default swaps?