Suppose that a default-risk-free zero-coupon bond with a face value of $100 and 5 years to maturity is currently trading at $60. Another bond with the same face value and time to maturity but at risk of defaulting sells for $30. (If this risky bond defaults, there is a 70% chance that 30% of the face value will be recovered and a 30% chance that 50% of the face value will be recovered.) Also, suppose the spread between the expected zero rates of the two bonds is 5% pa. What must be the default probability of the second bond (risky bond)? Choose the closest answer. O 47.66% 58.82% 37.32% None of the other answers are correct. 67.23%
Suppose that a default-risk-free zero-coupon bond with a face value of $100 and 5 years to maturity is currently trading at $60. Another bond with the same face value and time to maturity but at risk of defaulting sells for $30. (If this risky bond defaults, there is a 70% chance that 30% of the face value will be recovered and a 30% chance that 50% of the face value will be recovered.) Also, suppose the spread between the expected zero rates of the two bonds is 5% pa. What must be the default probability of the second bond (risky bond)? Choose the closest answer. O 47.66% 58.82% 37.32% None of the other answers are correct. 67.23%
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter4: Bond Valuation
Section: Chapter Questions
Problem 8MC: Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for...
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![Use the following information to answer the question(s) below.
Suppose that a default-risk-free zero-coupon bond with a face value of $100 and 5
years to maturity is currently trading at $60. Another bond with the same face
value and time to maturity but at risk of defaulting sells for $30. (If this risky bond
defaults, there is a 70% chance that 30% of the face value will be recovered and a
30% chance that 50% of the face value will be recovered.) Also, suppose the
spread between the expected zero rates of the two bonds is 5% pa.
What must be the default probability of the second bond (risky bond)? Choose the
closest answer.
O 47.66%
58.82%
37.32%
None of the other answers are correct.
O 67.23%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fedbd0a5d-0e43-41b1-a3de-4c5dcfca7a91%2Fc0e60284-63da-43be-b821-c10f0654f915%2F831cyx4_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Use the following information to answer the question(s) below.
Suppose that a default-risk-free zero-coupon bond with a face value of $100 and 5
years to maturity is currently trading at $60. Another bond with the same face
value and time to maturity but at risk of defaulting sells for $30. (If this risky bond
defaults, there is a 70% chance that 30% of the face value will be recovered and a
30% chance that 50% of the face value will be recovered.) Also, suppose the
spread between the expected zero rates of the two bonds is 5% pa.
What must be the default probability of the second bond (risky bond)? Choose the
closest answer.
O 47.66%
58.82%
37.32%
None of the other answers are correct.
O 67.23%
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