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The market knows that a company faces the following scenario-there is a 90% chance that it will be able to pay interest and principal on
The market knows that a company faces the following scenario-there is a 90% chance that it will be able to pay interest and principal on its one year bond, 5% that it will default on the interest, and 5% that it will pay a total of $950 to bondholdersof its one year bond.Assuming that everybody is risk neutral, what will be the promised rate of return on this bond in equilibrium? You can assume at 3% risk free rate of return.
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