Problem 24-14 Predicting default probability Upsilon's assets have a current market value of $100. Its debt has a face value of $60, and it matures in one year. Assume a risk-free rate of interest is 5%. Suppose that the standard deviation of the return on Upsilon's assets is 50%. Calculate the probability that the company will default. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Probability %

Problem 24-14 Predicting default probability Upsilon's assets have a current market value of $100. Its debt has a face value of $60, and it matures in one year. Assume a risk-free rate of interest is 5%. Suppose that the standard deviation of the return on Upsilon's assets is 50%. Calculate the probability that the company will default. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Probability %

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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28. An investor buys a T-bill at a bank discount quote of 4.60 with 160 days to maturity. The investor's actual annual rate of return on this investment was 4.76% 4.89% 4.66% 5.00%
None
Maturity Periods Years Yield 1 year 1.00 5.37% 2 years 2.00 5.47% 3 years 3.00 5.65% 4 years 4.00 5.71% 5 years 5.00 5.64% 10 years 10.00 5.75% 20 years 20.00 6.33% 30 years 30.00 5.94%
50 10 points Skipped Both Bond A and Bond B have 9.8 percent coupons and are priced at par value. Bond A has 9 years to maturity, while Bond B has 20 years to maturity. a. If interest rates suddenly rise by 2.4 percent, what is the percentage change in price of Bond A and Bond B? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) %A in Price eBook Bond A Bond B Print References % % b. If interest rates suddenly fall by 2.4 percent instead, what would be the percentage change in price of Bond A and Bond B? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) %A in Price Bond A Bond B % %
Problem 6-23 Real Returns (LO3) Suppose that you buy a TIPS (inflation-indexed) bond with a 2-year maturity and a (real) coupon of 4.4% paid annually. If you buy the bond at its face value of $1,000, and the inflation rate is 8.60% in each year. a. What will be your cash flow in year 1? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Cash flow b. What will be your cash flow in year 2? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Cash flow c. What will be your real rate of return over the two-year period? Note: Enter your answer as a percent rounded to 1 decimal place.
You Answered orrect Answer A company is promising a coupon payment of $46 in 2.03 years. A risk free government bond of the same maturity is yielding 1.66% per year. The credit spread for the promised payment by the company is 1.24% per year. Both the yield and the spread are stated on a continuously compounded basis. What is the present value of the expected loss on the promised payment? 1.11 margin of error +/-50
Can you please walk me through this? Problem 6-11 DEFAULT RISK PREMIUM A company’s 5-year bonds are yielding 7.75% per year. Treasury bonds with the same maturity are yielding 5 2% per year, and the real risk-free rate (r*) is 2.3%. The average inflation premium is 2 5%; and the maturity risk premium is estimated to be 0.1 x (t 1) %, where t = number of years to maturity. If the liquidity premium is 1%, what is the default risk premium on the corporate bonds?
Question 2 Assume the yield curve is flat shown as following table. A cash and $duration-neutral butterfly is to be constructed by selling one thousand 7-year coupon paying bonds and purchasing qs and ql coupon paying bonds with maturities 3 and 15 years respectively. More information on the bonds to be used in the strategy is given Note that we are assuming all bonds pay interest semi-annually. (a) Explain how to interpret the modified duration of -8.86 corresponding to the 15-year maturity bond. (b) Write down the system of equations that needs to be solved in order to find qs and ql and verify that the solution to this system is qs = 679.32 and ql =366.23. (c) Find the profit from this strategy if yield curve moves: (i) up to 8% pa and (ii) down to 5% pa. (d) Explain why in practice it may be difficult to profit from the cash and $duration neutral butterfly. (e) Explain the major differences between the 50-50 butterfly strategy and the cash and $duration neutral butterfly.
6f

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