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You invest 27,000 in a corporate bond selling for $900 per $1000. Over the coming year,...

You invest 27,000 in a corporate bond selling for $900 per $1000. Over the coming year, the bond will pay interest of $75 per $1000 of par value. The price of the bond at year’s end will depend of the level of interest rate prevailing at that time. You construct the following scenario analysis:

Interest

Probability

Year-End Bond Price

High

0.2

$840

Unchanged

0.5

915

Low

0.3

975

Your alternative investment is a T-bill that yields a certain rate of 5%. Calculate the HPR for each scenario, the expected rate of return, and the risk premium on your investment.   What is the expected year-end dollar value of your investment? (9 Points)

Solutions

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

jeff jeffy answered 1 year ago
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