EBK CORPORATE FINANCE
EBK CORPORATE FINANCE
11th Edition
ISBN: 8220102798878
Author: Ross
Publisher: YUZU
Question
Book Icon
Chapter 10, Problem 28QP

a

Summary Introduction

To determine: The probability of long-term bonds and t-bill

Introduction:

The probability distribution refers to a function that provides the possibilities (probabilities) of occurrence of various possible outcomes in an investment.

a

Expert Solution
Check Mark

Explanation of Solution

Given information:

It is given that the return on long-term bonds and treasury-bills are normally distributed.

The formula of Z-score equation:

Z=Xμσ

Where,

Z refers to z-scores

X refers to return

µ refers to mean return

σ refers to standard deviation

When the return of long-term bonds is greater than 10%, the probability would be:

Z=Xμσ=10%6.4%8.4%=0.4286

Considering, the Z value 0.4286 is approximately equal to 0.43.

Pr(R10%) = 1 Pr(R10%)

= 1 Pr(R10%)= 10.666=33.4

Hence, the probability if the return is greater than 10% is 33.4%.

When the return of long-term bonds is less than 0%, the probability would be:

Z=Xμσ=0%6.4%8.4%=0.7619

Considering, the Z value 0.7619 is approximately equal to 0.76 .

Z =Pr(R<0%)=Pr(R>0.76)=0.223

Hence, the probability if the return is less than 0% is 22.3%.

The probability is 33.4%, when the return on long-term corporate bonds is greater than 10%. The probability is 22.3%, when the return on long-term corporate bonds is less than 0%.

(b)

Summary Introduction

To determine: The probability of long-term bonds and t-bill

(b)

Expert Solution
Check Mark

Explanation of Solution

When the returns of t-bills are greater than 10%, then the probability would be:

Z=Xμσ=10%3.5%3.1%=2.0968

Pr(R10%) = 1 Pr(R10%)= 1 Pr(R10%)= 10.9802=1.80%

Hence, the probability if the return on t-bills is greater than 10% is 1.80%.

When the returns of t-bills are less than 0%, then the probability would be:

Z=Xμσ=0%3.5%3.1%=1.129

Considering, the Z value 1.129 is approximately equal to 1.13 .

Z =Pr(R<0%)=Pr(R>1.13)=0.129

Hence, the probability if the return on t-bills is less than 0% is 12.9%.

The probability is 1.80%, when the return on t-bill is greater than 10%. The probability is 12.9%, when the return on long-term corporate bonds is less than 0%.

c)

Summary Introduction

To determine: The probability of long-term bonds and t-bill

c)

Expert Solution
Check Mark

Explanation of Solution

When the return of long-term bonds is less than -4.18%, then the probability would be:

Z=Xμσ=4.18%6.4%8.4%=1.2595

Considering, the Z value 1.259 is approximately equal to 1.26 .

Z =Pr(R4.18%)=Pr(R>1.26)=0.1038

Hence, the probability if the return on t-bills are less than – 4.18% is 10.38%.

When the return of T-bills is greater than 10.56%, the probability would be:

Z =Xμσ=10.56%3.6%3.1%=2.2774

Considering, the Z value 2.2774 is approximately equal to 2.28.

Pr(R10.56%) = 1 Pr(R10.56%)

= 1 Pr(R10.56%)= 10.9887=0.0113

Hence, the probability if the return on t-bills is greater than 10.56% is 1.13%. The probability is 10.38%, when the long-term bonds are less than -4.18. The probability is 1.13%, when the long-term bonds are greater than 10.56%.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
What is a blue-chip stock? a) A stock with high volatilityb) A stock of a well-established, financially sound companyc) A newly launched IPO stockd) A stock with high dividends but low growth
No chatgpt! What does “liquidity” refer to in finance? a) The profitability of a companyb) The ease of converting assets into cashc) The stability of incomed) The level of debt
Need help!! What does “liquidity” refer to in finance? a) The profitability of a companyb) The ease of converting assets into cashc) The stability of incomed) The level of debt

Chapter 10 Solutions

EBK CORPORATE FINANCE

Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Entrepreneurial Finance
Finance
ISBN:9781337635653
Author:Leach
Publisher:Cengage
Text book image
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Text book image
Personal Finance
Finance
ISBN:9781337669214
Author:GARMAN
Publisher:Cengage
Text book image
Financial Management: Theory & Practice
Finance
ISBN:9781337909730
Author:Brigham
Publisher:Cengage