Question
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
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.
A) What is the expected return on SuperTech and GOV bonds?
B) Calculate the current price of the SuperTech bond if it promises to pay 250 in case of no default.
C) ) How much will investors be able to recover (in ) in case of default? Assume the probability of default is 5%.
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Recent Advances In Computational Finance
Authors: Nikolaos S. Thomaidis, Jr. Dash, Gordon H.
1st Edition
1626181233, 978-1626181236
