Tomorrow your firm will issue 30K one-year zero-coupon bonds outstanding priced at $800 per bond. The bonds
Question:
Tomorrow your firm will issue 30K one-year zero-coupon bonds outstanding priced at $800 per bond. The bonds have a promised cash flow, i.e. face value ,of $900. If the firm does not default, it can fully repay the bonds. If the firm defaults, the value of assets will equal $25M and the firm will pay $3M in bankruptcy costs. What is the promised rate of return on these bonds?
a. 0.11
b. 0.13
c. 0.25
Tomorrow your firm will issue 30K one-year zero-coupon bonds outstanding priced at $800 per bond. The bonds have a promised cash flow, i.e. face value , of $900. If the firm does not default, it can fully repay the bonds. If the firm defaults, the value of assets will equal $25M and the firm will pay $3M in bankruptcy costs.
If the expected return on these bonds equals 6 percent, what is the probability of default implied by bond’s expected return?
a. 0.50
b. 0.31
c. 0.72
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta