Question

A bond will payoff $2000 with a probability of 80% and will pay off only $500...

A bond will payoff $2000 with a probability of 80% and will pay off only $500 with a probability of 20% next year. The risk-free rate of return is 3%. What is the appropriate promised yield (return) on this bond?

Select one:

a. Promised return = 1.18%

b. Promised return = 31.18%

c. Promised return = 11.18%

d. Promised return = 21.18%

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

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 junk bond with a face value of $115 and a beta of 0.6 will default...
A junk bond with a face value of $115 and a beta of 0.6 will default with 30% probability. If it does, investors receive only 50% of what is due to them. The risk-free rate is 3.4% per year and the market risk premium is 8.2% per year. What is the promised rate of return of this bond? Select one: a. Promised return 29.44 b. Promised return 31.44 c. Promised return 27.44 d. Promised return 25.44
On Jan 1st, 2000, the real risk-free rate is 2% and is expected to be constant...
On Jan 1st, 2000, the real risk-free rate is 2% and is expected to be constant for next 20 years. Inflation is expected to be 7% next year, 5% the following year, and 3% thereafter. The maturity risk premium is estimated to be 0.2*(t -1) % and up to 1%. (t = number of years to maturity). Please estimate the term structure of US treasury. Draw the yield curve on Jan 1st, 2000 and what’s the expected yield curve on...
On Jan 1st, 2000, the real risk-free rate is 2% and is expected to be constant...
On Jan 1st, 2000, the real risk-free rate is 2% and is expected to be constant for next 20 years. Inflation is expected to be 7% next year, 5% the following year, and 3% thereafter. The maturity risk premium is estimated to be 0.2*(t -1) % and up to 1%. (t = number of years to maturity). Please estimate the term structure of US treasury. Draw the yield curve on Jan 1st, 2000 and what’s the expected yield curve on...
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%
Which of the following statements is FALSE? Select one: A. For corporate bonds, the issuer may...
Which of the following statements is FALSE? Select one: A. For corporate bonds, the issuer may default—that is, it might not pay back the full amount promised in the bond certificate. B. Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond. C. The yield to maturity of a defaultable bond is equal to the expected return of investing in the bond. D. The risk of default, which is known as the credit...
You can choose to undertake two mutually exclusive projects: Project 1 will return in one year...
You can choose to undertake two mutually exclusive projects: Project 1 will return in one year a payoff of 120 with probability 10%, or a 0 payoff with 90% probability. Project 2 will return in one year a risk-free payoff of 15. Both projects require an initial investment of 10. You do not have any money and need to raise it from external debt holders. Assume that everybody is risk-neutral, that the risk-free interest rate is 0 and that bond...
What would you pay for a bond with a $10,000 maturity value, a $500 coupon payment...
What would you pay for a bond with a $10,000 maturity value, a $500 coupon payment and a 20 year term to maturity when your best alternative rate of return is r = .10. Compare this answer with the answer to the last question. Notice that if the interest rate increases, then the price that you'd pay for the bond decreases. This is because at the higher rate of interest, you would now need to invest less in the best...
16) A) A company is planning to issue an annual-pay $500 face value bond that matures...
16) A) A company is planning to issue an annual-pay $500 face value bond that matures in 10 years with a coupon rate of 7.5%. If similar bonds are currently priced to yield 9.25%, what is the price of the bond? B) After a recent IPO, SOME Co. has a unique dividend policy. Next year they anticipate paying out a $2 dividend. In year 2, they will increase the dividend to $2.50. In year 3, the dividend will increase to...
(a)       Consider a 14-year, 9.5% corporate bond with face value $10,000. Assume that the bond pays...
(a)       Consider a 14-year, 9.5% corporate bond with face value $10,000. Assume that the bond pays semi-annual coupons. Compute the fair value of the bond today if the nominal yield-to-maturity is 11% compounded semi-annually. (b)       Consider a 11-year, corporate bond with face value $1,000 that pays semi-annual coupon. With the nominal yield-to-maturity equal to 10%, the bond is selling at $802.5550. Find the coupon rate for this bond. Assume that the market is in equilibrium so that the fair value...
Compute the probability that the S&P 500 index value is greater than 2,400 in 1 year...
Compute the probability that the S&P 500 index value is greater than 2,400 in 1 year according to the Black Scholes model. Assume that the current level of the index is 2,200, the risk-free rate is 2% per annum, the dividend yield on the index is 1% per annum, and the volatility of the index is 20%.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT