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A firm plans to liquidate in one year and use the proceeds to pay its bondholders and shareholders. The firms

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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%.

  1. (a) What is the price of the bond?

  2. (b) What is the YTM of the bond? (State this in percent and give at least 2 decimal places of accuracy.)

  3. (c) What is the credit premium for the bond?


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Operations Management

Operations Management

ISBN: 978-0078024108

12th edition

Authors: William J Stevenson

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Posted Date: June 01, 2020 07:07:16
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