Your boss asks you to determine the fair market value of a bond. The following information is available about this bond: the bond contract specifies only one payment of $330 million in one year. The firm defaults on this contract with 5% probability, but you do not have information on the payment bondholders will receive in the event of default. The yield to maturity on comparable bonds trading in the market is 10%, and the firm’s cost of debt r_d (expected return) is 8%. 

Required

Calculate  the fair value of the bond.

Answer rating: 100% (QA)

To calculate the fair value of the bond we need to discount the expected cash flow to present value ... View the full answer