Question
You price a corporate bond adjusting the discount rate to take into account the riskiness of that firm. Using the CAPM to estimate the discount
You price a corporate bond adjusting the discount rate to take into account the riskiness of that firm. Using the CAPM to estimate the discount rate, you find a yield to maturity (YTM) equal to 10%.
a. If you know that the firm has small capitalization and high book-to-market ratio, how would you compute the discount rate, and what will be the effect on the YTM? Why?
b. What is the discount rate that is used by a risk-neutral investor?
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Foundations of Financial Management
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
16th edition
125927716X, 978-1259687969, 1259687961, 978-1259277160
