Adidas issued a zero-coupon bond with a five-year maturity and a $100 face value. You believe there is a 20% chance that they will default, and if they do default, you expect to receive only 55 cents per dollar of what you are promised. If you require a 6% expected return on this investment: a. what will be the price of these bonds, and 2. what will be the yield to maturity on these bonds? Note: Assume annual compounding.
Adidas issued a zero-coupon bond with a five-year maturity and a $100 face value. You believe there is a 20% chance that they will default, and if they do default, you expect to receive only 55 cents per dollar of what you are promised. If you require a 6% expected return on this investment: a. what will be the price of these bonds, and 2. what will be the yield to maturity on these bonds? Note: Assume annual compounding.
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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Adidas issued a zero-coupon bond with a five-year maturity and a
return on this investment: a. what will be the price of these bonds, and 2. what will be the yield to maturity on these bonds?
$100
face value. You believe there is a
20%
chance that they will default, and if they do default, you expect to receive only
55
cents per dollar of what you are promised. If you require a
6%
expected Note:
Assume annual compounding.Question content area bottom
Part 1
a. The price of these bonds is
$enter your response here.
(Round to the nearest cent.)b. The yield to maturity on these bonds is
enter your response here%.
(Round to two decimal places.)Expert Solution
Step 1: Define=zero coupon bonds
Zero coupon bonds are not paid any coupon payments but par value is paid on maturity of bond.
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