The Isabelle Corporation rents prom dresses in its stores across the southern United States. It has just issued a five-year, zero-coupon corporate bond at a price of $62 (assume a $100 facevalue bond). You have purchased this bond and intend to hold it until maturity.a. What is the yield to maturity of the bond?b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default?c. What is the expected return (expressed as an EAR) if there is a 100% probability of default and you will recover 90% of the face value?d. What is the expected return (expressed as an EAR) if the probability of default is 50% in good times, the likelihood of default is higher in bad times than good times, and, in the case of default, youwill recover 90% of the face value?e. For parts (b) through (d), what can you say about the five-year, risk-free interest rate in each case?Note: Assume annual compounding.Ca. What is the yield to maturity of the bond?The yield to maturity of the bond is 10.03%. (Round to two decimal places.)b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default?The expected return on your investment is %. (Round to two decimal places.)

Since you have posted a question with multiple sub-parts, we will solve the first three sub-parts…

a. What is the yield to maturity of the bond? b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default? c. What is the expected return (expressed as an EAR) if there is a 100% probability of default and you will recover 90% of the face value?

a. What is the yield to maturity of the bond? b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default? c. What is the expected return (expressed as an EAR) if there is a 100% probability of default and you will recover 90% of the face value?

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.

Question

The Isabelle Corporation rents prom dresses in its stores across the southern United States. It has just issued a five-year, zero-coupon corporate bond at a price of $62 (assume a $100 face
value bond). You have purchased this bond and intend to hold it until maturity.
a. What is the yield to maturity of the bond?
b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default?
c. What is the expected return (expressed as an EAR) if there is a 100% probability of default and you will recover 90% of the face value?
d. What is the expected return (expressed as an EAR) if the probability of default is 50% in good times, the likelihood of default is higher in bad times than good times, and, in the case of default, you
will recover 90% of the face value?
e. For parts (b) through (d), what can you say about the five-year, risk-free interest rate in each case?
Note: Assume annual compounding.
C
a. What is the yield to maturity of the bond?
The yield to maturity of the bond is 10.03%. (Round to two decimal places.)
b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default?
The expected return on your investment is %. (Round to two decimal places.)

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