The company SuperTech issues a one-year bond with the promised return of 5.67%. The default premium on the SuperTech bond is 2.1%. GOV is a riskless one-year government bond with the current price of 200. Assume that investors are risk neutral. Further, they are indifferent between holding the corporate bond or the government bond.

The company SuperTech issues a one-year bond with the promised return of 5.67%. The default premium on the SuperTech bond is 2.1%. GOV is a riskless one-year government bond with the current price of 200. Assume that investors are risk neutral. Further, they are indifferent between holding the corporate bond or the government bond. (i) Briefly explain (in no more than 7 lines) why the expected return of the SuperTech bond does not equal its promised return. (10%) (ii) What is the expected return on SuperTech and GOV bonds? (10%) (iii) Calculate the current price of the SuperTech bond if it promises to pay 250 in case of no default. (15%) (iv) How much will investors be able to recover (in ) in case of default? Assume the probability of default is 5%. (25%) (v) Without doing any detailed computations, which of the bonds will have a greater price sensitivity to interest rate changes: (a) a 25-year zero coupon bond or a 10-year zero coupon bond? (b) a 5% coupon or a 10% coupon bond (assuming they have identical time to maturity)? Briefly explain why. (25%) (vi) Discuss why bond prices tend to move inversely to interest rates, clearly explaining the economic intuition that underpins this negative relationship. (15%)