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Two firms exist that are identical in all respects except for the risk of their assets. Both firms have assets worth $1,000,000, and have issued

Two firms exist that are identical in all respects except for the risk of their assets. Both firms have assets worth $1,000,000, and have issued zero coupon bonds with a face value of $500,000. The standard deviation of the return on these firm 1s assets is 30%, and the standard deviation of the return on firm 2s assets is 50%. Assume that both firms will be liquidated one year from today and that the rate of interest is 5%.

B. What is the fair value for the bonds issued by firm 2? What is the dollar value of its limited liability put option? What is the yield to maturity on its bonds?

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