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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