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?

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

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