Tomorrow your firm will issue 30K one-year zero-coupon bonds outstanding priced at $800 per bond. The bonds have a promised cash flow, i.e. 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. What is the promised rate of return on these bonds?

a. 0.11

b. 0.13

c. 0.25

Tomorrow your firm will issue 30K one-year zero-coupon bonds outstanding priced at $800 per bond. The bonds have a promised cash flow, i.e. 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 bonds expected return?

a. 0.50

b. 0.31

c. 0.72