Consider a one year bond with a coupon of 10%

Finance Mar 18, 2021

Consider a one year bond with a coupon of 10%. The current price is $800 with a maturity at par in one year. What is the yield to maturity? Suppose there’s a 50% probability of default on this bond and in the event of a default, there would be a 70% recovery rate with no payment of interest. What is the expected return of this bond.

Expert Solution

Answer:

a.)

PMT = 100 I = ? 37.5 N = 1

FV = 1000

PV = -800

b.) (.50 x 37.5) + (.50 x -.12.5) = 18.75 + -6.25 = 12.5% Expected Return

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