Assume that the CAPM holds, that the riskfree rate is constant through time, and that U.S. Treasury
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Assume that the CAPM holds, that the riskfree rate is constant through time, and that U.S. Treasury debt instruments are default free. ZF Co’s coupon bonds have exactly the same coupons and face value as a given U.S. Treasury bond. Moreover, ZF Co’s coupon bonds have non-zero default risk, and have a zero Beta with respect to the market. So a ZF Co bond is identical to the given Treasury bond, except that the ZF Co bond has default risk while the Treasury bond does not. Which of the following statements about the two bonds is true?
- A. The two bonds have the same expected returns and the same yields to maturity
- B. The two bonds have the same expected returns but different yields to maturity
- C. The two bonds have different expected returns but the same yields to maturity
- D. The two bonds have different expected returns and different yields to maturity
- E. Need more information to say anything about the relative magnitudes of their expected returns and yields to maturity
Related Book For
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1285190907
8th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
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