Collingwood Corp. is able to issue its 60-day commercial paper at par with a promised yield of

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Collingwood Corp. is able to issue its 60-day commercial paper at par with a promised yield of 9 percent per year. The current T-bill yield is 6 percent per year (or 1 percent for the 60-day period), which is also the expected return on the commercial paper, as there is some risk of default. If Collingwood were to default, investors would recover 80 percent of the face value of the debt. Based on this information, what is the probability that Collingwood will default on its commercial paper? Round to two decimals.

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...
Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...
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Introduction To Corporate Finance

ISBN: 9781118300763

3rd Edition

Authors: Laurence Booth, Sean Cleary

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