Question: Problem 3 (12 points) A zero-coupon bond maturing in 3 years with a face value of $1,000 has a 10% chance of defaulting. Regardless of

Problem 3 (12 points) A zero-coupon bond maturing in 3 years

Problem 3 (12 points) A zero-coupon bond maturing in 3 years with a face value of $1,000 has a 10% chance of defaulting. Regardless of when the company defaults, any recovery payments made to debt holders will be at maturity in three years. Assume the recovery rate will be 80% in the event of default a) What is the expected payment for bondholders at maturity? (4 points) Expected payment: (b) Assuming the company's defaul is uncorrelated with the market, and the yield on a zero-coupon US treasury expiring three years is 2%, what is the price of the company's bond today? Assume that al assetsexpected returns follow the CAPM. (4 points) W Bond price

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