B2. Corporate Bonds (Answer all parts of this question.) Suppose you have a 6% coupon bond that matures in 1 year from now. The principal is 1,000. The bond currently trades at 900. Assume that the risk-free rate is at 2%. (a) (b) (c) (d) (e) How large is the risk premium? How much would it cost you to insure this bond against default today? What is the expected cash flow Eo [CF₁]? What is the probability of default p? Show that the expected profit from selling insurance against default is 0.
B2. Corporate Bonds (Answer all parts of this question.) Suppose you have a 6% coupon bond that matures in 1 year from now. The principal is 1,000. The bond currently trades at 900. Assume that the risk-free rate is at 2%. (a) (b) (c) (d) (e) How large is the risk premium? How much would it cost you to insure this bond against default today? What is the expected cash flow Eo [CF₁]? What is the probability of default p? Show that the expected profit from selling insurance against default is 0.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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