As a financial analyst at Bank of America Merrill Lynch, you
want to find out how the credit risks impact the yield to maturity
on a bond. A 12% bond maturing in three years is priced at 85% of
the face value. Suppose that there is a 20% chance that at maturity
the bond will default and you will receive only $400 payment.
a. What is the bond’s promised yield to maturity? (sample answer: 15.50%)
b. What is its expected yield to maturity?
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