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.

D4) Suppose that there is 30-year coupon bond with par value of $100 and Macaulay duration of 20.56. The coupon rate is unknown. Currently, the bond is traded at $90 and the yield is flat at 20% pa. Yield to maturity is an annualized simple interest rate compounded annually. If the bond yield increases by 50 basis points, what is the approximation of the percentage capital gain or loss? Please choose the correct range for the percentage capital gain/loss, i.e., if it is -3.5%, please select “A value between -3% and -4%” A value between -9% and -10% A value between -8% and -9% None of the other answers are correct. A value between -7% and -8% A value between -10% and -11%

Question 2A. A bond has a face value of $2000, a coupon rate of 6% and matures in 10years’ time. If its current yield to maturity is 8% what is the current price ofthe bond? If the yield falls to 4% determine the bond price. What do theseresults indicate about the relationship between the price of a bond and itsyield to maturity? B. You are asked to put a value on a bond which promises eight annual couponpayments of £70 and will repay its face value of £1000 at the end of eightyears. You observe that other similar bonds have yields to maturity of 9 percent. How much is this bond worth? You are offered the bond for a priceof £1030.44. What yield to maturity does this represent? C. Explain in detail the trade-off model of capital structure. In light of the currentglobal financial challenge, discuss which elements of the model areexpected to become most prevalent?

Suppose that you are interested in purchasing a bond issued by the VPI Corporation. The bond is quoted in the Wall Street Journal as selling for 89.665. How much will you pay for the bond if you purchase it at the quoted price? Assuming you hold the bond until maturity, how much will you receive at that time? If you purchase the bond at the quoted price, you would pay $. (Round to the nearest cent) Assuming you hold the bond until maturity, you would receive $ (Round to the nearest dollar)