Question

A zero-coupon bond has a beta of 0.1 and promises to pay $1,000 next year with a probability of 98%. If the bond defaults, it will pay nothing. One-year Treasury securities are yielding 5%, and the equity premium is 7%. What is the time premium for this bond investment?

Answer #1

Particulars | Amount |

Face value | $ 1,000 |

Probability of payment | 98% |

Beta of bond | 0.10 |

Risk free rate | 5.00% |

Equity premium | 7.00% |

Time premium | $ 55.86 |

[ 1000×0.98× (0.05+0.1×0.07) ] |

Answer is **$55.86**

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