You are considering buying a risky bond. The bond has a $1,000 face value, a 2-year maturity,

and a coupon rate of 8%. You believe the probability the company will survive to pay off the

bond is 92%. You also believe there is a 8% probability the company will default within the first

2 months, in which case you will be able to recover 60% of the bonds face value at the end of

year 2. The bond is selling for $925. (USE EXCEL AND SHOW ALL FORMULAS USED)

a. Calculate the expected return on this bond on an annual basis.

b. Use Goal Seek or Solver to determine the probability of survival that would yield an

expected annual return of 7%

If you use Goal Seek to determine an answer, please identify the

i. Set Cell

ii. To Value

iii. By Changing Cell

If you use Solver to determine an answer, please identify the

i. Set Objective (Cell)

ii. To Value

iii. By Changing Variables Cell

iv. Subject to (if used)