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You own a 5% corporate bond maturing in two years and priced at 90% of $100 face value. Suppose that there is a 20% chance
You own a 5% corporate bond maturing in two years and priced at 90% of $100 face value. Suppose that there is a 20% chance that at maturity, the bond will default, and you will receive only 40% of the principal. Assume annual coupon payments.
What is the bond's promised yield to maturity? What is its expected yield? How much would you lose if you believe in promised yield?
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