Question: 3. A bond will pay off $100 with a probability of 99% and will pay off nothing with a probability of 1%. The equivalent risk-free

3. A bond will pay off $100 with a probability of 99% and will pay off nothing with a probability of 1%. The equivalent risk-free rate of return is 5%. What is an appropriate promised yield on this bond if investors are risk-neutral?

4. If the bond in question (3) promised a yield of 7%, what are the time premium, default premium, and risk premium?

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