Calculating the risk premium on bonds The text presents a formula where (1+) = (1-pX1+i+x)+ p(0) where i is the nominal interest rate on a riskless bond x is the risk premium p is the probability of default (bankruptcy) If the probability of bankruptcy is zero, the rate of interest on the risky bond is When the nominal interest rate for a risky borrower is 8% and the nominal policy rate of interest is 3%, the probability of bankruptcy is %. (Round your response to two decimal places.) When the probability of bankruptcy is 6% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) When the probability of bankruptcy is 11% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) The formula assumes that payment upon default zero. In fact, it is often positive. How would you change the formula this case? O A. The final term would become p "times" some fraction of (1+i+x). O B. The final term would become p "times" 1. O c. The final term would become some fraction of (1+i+ x). O D. The final term would become p "times" some fraction of /+x.
Calculating the risk premium on bonds The text presents a formula where (1+) = (1-pX1+i+x)+ p(0) where i is the nominal interest rate on a riskless bond x is the risk premium p is the probability of default (bankruptcy) If the probability of bankruptcy is zero, the rate of interest on the risky bond is When the nominal interest rate for a risky borrower is 8% and the nominal policy rate of interest is 3%, the probability of bankruptcy is %. (Round your response to two decimal places.) When the probability of bankruptcy is 6% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) When the probability of bankruptcy is 11% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) The formula assumes that payment upon default zero. In fact, it is often positive. How would you change the formula this case? O A. The final term would become p "times" some fraction of (1+i+x). O B. The final term would become p "times" 1. O c. The final term would become some fraction of (1+i+ x). O D. The final term would become p "times" some fraction of /+x.
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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Transcribed Image Text:Calculating the risk premium on bonds
The text presents a formula where
(1+) = (1-p)(1 +i+x) + p(0)
where
i is the nominal interest rate on a riskless bond
x is the risk premium
p is the probability of default (bankruptcy)
If the probability of bankruptcy is zero, the rate of interest on the risky bond is
When the nominal interest rate for a risky borrower is 8% and the nominal poli
tis 3%, the probability of bankruptcy is %. (Round your response to two decimal places.)
When the probability of bankruptcy is 6% and the nominal policy rate of interes
inal interest rate for a risky borrower is %. (Round your response to two decimal places.)
i+x
When the probability of bankruptcy is 11% and the nominal policy rate of intere
minal interest rate for a risky borrower is %. (Round your response to two decimal places.)
The formula assumes that payment upon default is zero. In fact, it is often posi
How would you change the formula in this case?
O A. The final term would become p "times" some fraction of (1 +i+ x).
O B
The final term would become p "times" 1.
O C. The final term would become some fraction of (1+i+x).
O D. The final term would become p "times" some fraction of i+x
Transcribed Image Text:Calculating the risk premium on bonds
The text presents a formula where
(1+1) = (1-p)(1 +i+x) + p(0)
where i is the nominal interest rate on a riskless bond
x is the risk premium
p is the probability of default (bankruptcy)
If the probability of bankruptcy is zero, the rate of interest on the risky bond is
When the nominal interest rate for a risky borrower is 8% and the nominal policy rate of interest is 3%, the probability of bankruptcy is %. (Round your response to two decimal places.)
When the probability of bankruptcy is 6% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.)
When the probability of bankruptcy is 11% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.)
The formula assumes that payment upon default is zero. In fact, it is often positive.
How would you change the formula in this case?
O A. The final term would become p "times" some fraction of (1+i+x).
O B. The final term would become p "times" 1.
O C. The final term would become some fraction of (1+i+ x).
OD.
The final term would become p "times" some fraction of i+x.
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