Suppose the firm issues a single zero coupon bond a Suppose the maturity value of the bond is $80 Compute the yield and default probability for times to maturity of 1, 2, 3, 4, 5, 10, and 20 years b Repeat part (a), only supposing the maturity value is $120 c Does default probability increase or de...

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Suppose the firm issues a single zero-coupon bond. a. Suppose the maturity value of the bond is

Question:

Suppose the firm issues a single zero-coupon bond.
a. Suppose the value of the bond is $80. Compute the yield and default probability for times to of 1, 2, 3, 4, 5, 10, and 20 years.
b. Repeat part (a), only supposing the value is $120.
c. Does default probability increase or decrease with debt Explain.
For the first eight problems, assume that a firm has assets of $100, with σ = 40%, α = 15%, and δ = 0. The risk-free rate is 8%.
Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...