Question
The Loughran Corporation has issued zero-coupon corporate bonds with a five-year maturity. Investors believe there is a 30% chance that Loughran will default on these
The Loughran Corporation has issued zero-coupon corporate bonds with a five-year maturity. Investors believe there is a 30% chance that Loughran will default on these bonds. If Loughran does default, investors expect to receive 25% of their promised payoff at maturity (e.g., $0.25 cents per dollar they are promised). If investors require a 7% expected return on their investment in these bonds, which of the following statements most accurately describes the price and YTM of these bonds?
a. | This bond is priced at $77.50 per $100 face value with a current YTM of 5.2%. | |
b. | This bond is priced at $49.91 per $100 face value with a current YTM of 14.9%. | |
c. | This bond is priced at $71.30 per $100 face value with a current YTM of 7.0%. | |
d. | This bond is priced at $55.26 per $100 face value with a current YTM of 7.0%. | |
e. | This bond is priced at $55.26 per $100 face value with a current YTM of 12.6%. |
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