A firm plans to liquidate in one year and use the proceeds to pay its bondholders and
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Question:
A firm plans to liquidate in one year and use the proceeds to pay its bondholders and shareholders. The firm’s liquidation value has the following possi- ble outcomes:
Payoff (in million $’s) and Probability
$100 .......15%
$200 .......85%
The firm has issued a bond that promises a payment next year of $150 million. The expected rate of return on the bond is 6%.
(a) What is the price of the bond?
(b) What is the YTM of the bond? (State this in percent and give at least 2 decimal places of accuracy.)
(c) What is the credit premium for the bond?
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