Show all work. Label and clearly explain your answer. This is very important. 1) You must explain how you arrived at your answer in order to get full credit. 2) If you do show your work, and your answer is wrong, you can still earn a substantial amount of credit depending on how serious the error is. 3) If your answer is wrong, and you don't show your work, you will get a zero.

Zorrow Corporation has a zero-coupon bond which matures in six months. The current price of the bond is $88.12 per $100 of face value.

However, Zorrow is in some financial difficulty, and you estimate that there is a ten percent chance that they will default on the bond. Further, you estimate that under default, you will receive only 60 percent of the face value. (Assume that, in the event of default, you will receive the money in six months at the same time you would have received the face value). a) Calculate the promised yield to maturity of the Zorrow bond. b) Based on your default estimates, calculate the expected yield to maturity of the Zorrow bond. Hint: The expected payoff of the Zorrow bonds equals: (probability of default)(payoff if default) + (probability of no default)(payoff if no default).