27. A company has a constant 20% chance of defaulting. In a case of default, the bond will fall to 40% of its current value. You believe that the bond, based on its risk, should have an expected return of 12%. a) Find the bond's promised ytm. b) Find the bond's default premium.

27. A company has a constant 20% chance of defaulting. In a case of default, the bond will fall to 40% of its current value. You believe that the bond, based on its risk, should have an expected return of 12%. a) Find the bond's promised ytm. b) Find the bond's default premium.

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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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

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return of 12%, should you invest in triat pu
27. A company has a constant 20% chance of defaulting. In a case of default, the bond
will fall to 40% of its current value. You believe that the bond, based on its risk, should
have an expected return of 12%.
a) Find the bond's promised ytm.
b) Find the bond's default premium.

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