# Question: The Isabelle Corporation rents prom dresses in its stores across

The Isabelle Corporation rents prom dresses in its stores across the southern United States. It has just issued a five-year, zero-coupon corporate bond at a price of $74. You have purchased this bond and intend to hold it until maturity.

a. What is the yield to maturity of the bond?

b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default?

c. What is the expected return (expressed as an EAR) if there is a 100% probability of default and you will recover 90% of the face value?

d. What is the expected return (expressed as an EAR) if the probability of default is 50%, the likelihood of default is higher in bad times than good times, and, in the case of default, you will recover 90% of the face value?

e. For parts (b–d), what can you say about the five-year, risk-free interest rate in each case?

a. What is the yield to maturity of the bond?

b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default?

c. What is the expected return (expressed as an EAR) if there is a 100% probability of default and you will recover 90% of the face value?

d. What is the expected return (expressed as an EAR) if the probability of default is 50%, the likelihood of default is higher in bad times than good times, and, in the case of default, you will recover 90% of the face value?

e. For parts (b–d), what can you say about the five-year, risk-free interest rate in each case?

## Relevant Questions

What is the forward rate for year 2 (the forward rate quoted today for an investment that begins in one year and matures in twoyears)?Your brother wants to borrow $10,000 from you. He has offered to pay you back $12,000 in a year. If the cost of capital of this investment opportunity is 10%, what is its NPV? Should you undertake the investment opportunity? ...You are considering constructing a new plant in a remote wilderness area to process the ore from a planned mining operation. You anticipate that the plant will take a year to build and cost $100 million upfront. Once built, ...You own a car dealership and are trying to decide how to configure the showroom floor. The floor has 2000 square feet of usable space. You have hired an analyst and asked her to estimate the NPV of putting a particular model ...Bay Properties is considering starting a commercial real estate division. It has prepared the following four-year forecast of free cash flows for this division:Assume cash flows after year 4 will grow at 3% per year, ...Post your question