Tomorrow your firm will issue 30K one-year zero-coupon bonds outstanding priced at $800 per bond. The bonds
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Question:
Tomorrow your firm will issue 30K one-year zero-coupon bonds outstanding priced at $800 per bond. The bonds have a face value of $900. If the firm does not default, it can fully repay the bonds. If the firm defaults, the value of assets will equal $25M and the firm will pay $3M in bankruptcy costs.
If the expected return on these bonds equals 6 percent, what is the probability of default implied by bond's expected return?
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