Question

A zero-coupon bond has a beta of 0.1 and promises to pay $1,000 next year with...

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?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

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

Please rate.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A zero-coupon bond has a beta of 0.3 and promises to pay $1000 next year with...
A zero-coupon bond has a beta of 0.3 and promises to pay $1000 next year with a probability of 95%. If the bond defaults, it will pay nothing. One -year Treasury securities are yielding 2%, and the equity premium is 5%. What is the fair market value for this bond investment? $918 $950 $1,000 $956
A zero-coupon bond has a beta of 0.3 and promises to pay $1000 next year with...
A zero-coupon bond has a beta of 0.3 and promises to pay $1000 next year with a probability of 95%. If the bond defaults, it will pay nothing. One -year Treasury securities are yielding 2%, and the equity premium is 5%. What is the promised rate of return on this bond? Round your answer to the nearest tenth of a percent. 6.9% 8.0% 8.2% 8.9%
1. A one-year discount bond promises to pay 132,000 dollars next year. Brad requires a 20%...
1. A one-year discount bond promises to pay 132,000 dollars next year. Brad requires a 20% rate of return from this bond. In other words, if he thinks that the rate of return from this bond is less than 20%, he will not buy it. Another way of saying the same thing is that, Brad is not willing to pay a penny more than ______ dollars for this bond. 2. Suppose that a special bank account is paying an annual...
A "zero coupon bond" (or just "zero") is a bond, that does not pay any interest,...
A "zero coupon bond" (or just "zero") is a bond, that does not pay any interest, it just pays the face value when it matures. Of course nobody would purchase a bond without interest, that's why zero coupon bonds are sold at a discount. Suppose you are given the following information about the current prices of zero coupon bonds: bond: price 1-year zero, face value $1,000 $909.09 2-year zero, face value $1,000 $826.45 3-year zero, face value $1,000 $718.65 I.e....
You are considering an investment that promises to pay $1,000 per year for the next 10...
You are considering an investment that promises to pay $1,000 per year for the next 10 years. The interest rate associated with investments having similar risk is 6.0%. How much would you be willing to pay for this investment? Hint: students may wish to use Excel to facilitate the calculations
3. Suppose a bond you hold promises to pay you $150 each year for the next...
3. Suppose a bond you hold promises to pay you $150 each year for the next five years. (a) What type of bond are you holding? (b) What is the present value of this bond if the market interest rate is 4% and the bond is considered riskless? (c) If the risk premium is equal to 5%, what is the present value of this bond? Would you purchase this bond if it was offered to you for $550?
An investment promises to pay $1,000 for the next three years, an unknown amount in the...
An investment promises to pay $1,000 for the next three years, an unknown amount in the fourth year and $1,600 in the fifth year. What should the value of the fourth year payment be if the investment is required to yield 10% and is selling for $8,000? Please post work. Thank you
A 5-year zero coupon bond pays 10% annual coupons, and has a face value of $1,000....
A 5-year zero coupon bond pays 10% annual coupons, and has a face value of $1,000. Zero coupon bonds with 1-5 years to maturity, each with a face value of $100, have the following prices: Price of 1-year zero = $99.14 Price of 2-year zero = $97.88 Price of 3-year zero = $96.32 Price of 4-year zero = $89.44 Price of 5-year zero = $87.76 What is the price of the 5-year coupon bond?
5-year Treasury bond has a 4.2% yield. A 10-year Treasury bond yields 6.1%, and a 10-year...
5-year Treasury bond has a 4.2% yield. A 10-year Treasury bond yields 6.1%, and a 10-year corporate bond yields 8.3%. The market expects that inflation will average 2.4% over the next 10 years (IP10 = 2.4%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP...
) Consider a 4-year, 5% annual coupon bond with a face value of $10,000, which was...
) Consider a 4-year, 5% annual coupon bond with a face value of $10,000, which was issued three years ago. The bond just paid the coupon. Therefore, this bond has one year to maturity, and the next payment of the face and coupon will be made in exactly one year, after which the bond will cease to exist. If the bond defaults before next year, it will pay total of $8,000 in one year. The effective 1-year risk-free rate is...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT