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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%

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Answer #1

A zero coupon bond with face value of $1000 and maturity of 1 year.

As per CAPM equation

ER = Expected Return

Rf = Risk free Rate = 2%

MRP = Market Risk Premium = 5%

ER = 3.5%

Now price or present value of Zero coupon bond

FV = $1000

ER = 3.5%

n= 1 year

but it has probability of 0.95, so required price

So, the promised return for zero coupon bond

here FV = 1000, PV = 917.87, n= 1 year

r= 8.9%

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