Compute the promised yield to maturity and expected return to maturity on a default-risky 5-year pure-discount corporate bond that has a current price of $541 . With a probability of 0.7, the issuer will repay the principal of $1,000 at maturity
However, the probability is 0.3 that the issuer will default, in which case bondholders will receive only $500 per bond.
Promised Exp. Ret.
Yield to Mat.
a. 17.63% 13.06%
b. 17.63% 9.46%
c. 13.06% 9.46%
d. 13.06% 3.30%
FORMULAS: y = [X/P]1/T –1; rD = [E(PAY)/P]1/T –1, where E(PAY)= p[X] + (1-p)[X']
C
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