Question: 1. BOND PRICING WITHOUT DEFAULT (YOU SHOULD BE ABLE TO ANSWER THIS FROM CORPORATE FINANCE KNOWLEDGE) Even though most corporate bonds in the United States

1. BOND PRICING WITHOUT DEFAULT (YOU SHOULD BE ABLE TO ANSWER THIS FROM CORPORATE FINANCE KNOWLEDGE)

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of 1,000, 12 years to maturity, and a coupon rate of 8 percent paid annually. If the yield to maturity is 9 percent, what is the current price of the bond?

2. BOND PRICING WITH DEFAULT (THINK OF THE STRUCTURE WE DISCUSSED IN CLASS AND TRY TO SOLVE THIS. IT IS NOT TRIVIAL) Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of 1,000, 12 years to maturity, and a coupon rate of 8 percent paid annually. If the yield to maturity is 9 percent, what is the current price of the bond? Now the key difference is that every period, the firm may default with a probability of p = 0.02. Assume that in case of default the bond holders do not get anything. In reality, it is not actually this. The yield to maturity is a function of the bond's default risk and should change. But for our question, we will keep the YTM at the same value 9%.

3.BOND PRICING WITH DEFAULT (THINK OF THE STRUCTURE WE DISCUSSED IN CLASS AND TRY TO SOLVE THIS. IT IS NOT TRIVIAL)

Now the key difference is that every period, the firm may default with a probability of p = 0.02. The YTM remains constant at 9%

Assume the recovery rate is now 50%. That is in case of default, bond holders will only recover 50% of the face value. Calculate the price of the bond now,

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