Firm F has 4 categories of bonds, all with face value $1,000 and one-year maturity: - 1,000

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Question:

Firm F has 4 categories of bonds, all with face value $1,000 and one-year maturity:

- 1,000 zero-coupon senior secured bonds (A),

- 500 zero-coupon junior secured bonds (B),

- 300 zero-coupon unsecured bonds (C) (same seniority as B),

- 200 zero-coupon subordinated bonds (D).

If F is liquidated at the end of the year, how much does each category of debtholders recover in the following cases?

3.1 Scenario 1: Bonds A and B are secured on two buildings with liquidation value $1.3 million. The rest of F's assets have a $400,000 liquidation value.

3.2 Scenario 2: Bonds A and B are secured on two buildings with liquidation value $600,000. The rest of F's assets have a $1,000,000 liquidation value.

3.3 F only defaults in recession, which has a probability 0.2. In case of default, F is liquidated according to scenario 1. The return of the market portfolio in recession is -10%. Outside of recessions, that is, in normal times (probability 0.8), the market portfolio has a return of 13%. Suppose that the market value of one B-bond is $950, compute the β of one B-bond.