We have a 5% 1-year bond. (0.05) The bond's par is $1000. Actual interest - 1000*0.05= 50$ But there is a 20% chance the company will go into bankruptcy and only pay $500. What is the bond's value? Assume that the company's possible default is totally unrelated to other events in the economy and risk-free interest rate is 5%. If on top of default risk, investors require an additional 3 percent market risk premium, what are the price and YTM? Answer good? 1000"5%= 1050 * 0.80 = 840 500 0.20- 100 Expected CF = 940 Value = 940 / 1.05=$895 YTM = (1050/895 ) -1 = 17.3% Value=940 / 1.08 = $ 87000 YTM = (1050 / 87000)-1 20.7%