Question
You are analyzing a 1 year corporate bond issued by Bad Management Company. The company has a CCC rating by S&P suggesting a probability of
You are analyzing a 1 year corporate bond issued by Bad Management Company. The company has a "CCC" rating by S&P suggesting a probability of default of 19.0%. They have borrowed money on an uncollateralize basis, so you estimate the recovery rate on the company's bond to be just 25% in the event of a default. The 1-year bond you are looking at pays a coupon of 10% which will be paid at year end. The bond has a par value of $100. The risk free rate is 2.75%.
What is the maximum price one would pay for this bond if they wanted a fair risk adjusted rate of return?
a. $91.80
b. $110.00
c. $81.00
d. $100.00
What is the minimum credit spread you would accept when purchasing the bond if you wanted a fair risk adjusted rate of return?
a. 14.25%
b. 17.10%
c. 4.75%
d. 12.75%
e. 7.25%
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