EBK CORPORATE FINANCE
EBK CORPORATE FINANCE
11th Edition
ISBN: 8220102798878
Author: Ross
Publisher: YUZU
Question
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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%.

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Chapter 10 Solutions

EBK CORPORATE FINANCE

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