A two-year zero-coupon bond issued by ABC Co. is currently rated A. The market expects that one year from now the probability that the rating of ABC remains at A, is downgraded to BBB, or is upgraded to AA are, respectively, 80%, 15%, and 5%. Suppose that the risk-free rate is flat at 1% and that credit spreads for AA-, A-, and BBB-rated debt are flat at 80,150, and 280 basis points, respectively. All rates are compounded annually. What is the best approximation of the expected value of the zero-coupon bond one year from now? 1. 97.41 2. 97.37 3. 94.89 4. 92.44
A two-year zero-coupon bond issued by ABC Co. is currently rated A. The market expects that one year from now the probability that the rating of ABC remains at A, is downgraded to BBB, or is upgraded to AA are, respectively, 80%, 15%, and 5%. Suppose that the risk-free rate is flat at 1% and that credit spreads for AA-, A-, and BBB-rated debt are flat at 80,150, and 280 basis points, respectively. All rates are compounded annually. What is the best approximation of the expected value of the zero-coupon bond one year from now? 1. 97.41 2. 97.37 3. 94.89 4. 92.44
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
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Transcribed Image Text:A two-year zero-coupon bond issued by ABC Co. is currently rated A. The market expects that one year from now the probability that the rating
of ABC remains at A, is downgraded to BBB, or is upgraded to AA are, respectively, 80%, 15%, and 5%. Suppose that the risk-free rate is flat at
1% and that credit spreads for AA-, A-, and BBB-rated debt are flat at 80,150, and 280 basis points, respectively. All rates are compounded
annually. What is the best approximation of the expected value of the zero-coupon bond one year from now?
1. 97.41
2. 97.37
3. 94.89
4. 92.44
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