Michael M. specializes in buying high-risk commercial paper; his required return on these investments is 12 percent

Question:

Michael M. specializes in buying high-risk commercial paper; his required return on these investments is 12 percent per year. He is considering buying some 60-day paper from Collingwood Corp. with a promised yield of 9 percent per year. However, Michael believes there is a 1-percent chance that Collingwood will default on this debt, in which case he would only recover 80 percent of the face value. How much will Michael be willing to pay for each $1,000 of this paper?

Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...