You are considering buying a risky bond. The bond has a $1,000 face value, a 4-year...

You are considering buying a risky bond. The bond has a $1,000 face value, a 4-year maturity, and a coupon rate of 8%. You believe the probability the company will survive to pay off the bond is 90%. You also believe there is a 10% probability the company will default within the first 2 months, in which case you will be able to recover 35% of the bond’s face value at the end of year 4. The bond is selling for $910.
1. Calculate the expected return on this bond on an annual basis.
2. Use Goal Seek or Solver to determine the probability of survival that would yield an expected annual return of 4%.

Solutions

Expert Solution

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Suppose you are considering buying a $2,000,000 face value of bond in the secondary market. The...

Suppose you are considering buying a $2,000,000 face value of bond in the secondary market. The bond was issued in 2016 and is due in 2036. It is now 2020. In 2016, the appropriate market interest rate to price the bond was 8%. This bond pays quarterly interest payments. Currently, other bonds with similar risk charateristics are being issued into the market with 12% coupons. How much would you be willing to pay for this bond? Please tell me the...

A 5-year bond with a face value of $1,000 pays a coupon of 4% per year...

A 5-year bond with a face value of $1,000 pays a coupon of 4% per year (2% of face value every six months). The reported yield to maturity is 3% per year (a six-month discount rate of 3/2 =1.5%). What is the present value of the bond?

You own a 2-year bond that has a face value of $1,000 with a coupon rate...

You own a 2-year bond that has a face value of $1,000 with a coupon rate of 3.5%. If you sell it for $973, what is the current interest rate? Show your work and keep your answer to 2 decimal places if necessary

Suppose that you are considering investing in a four-year bond that has a face value of...

Suppose that you are considering investing in a four-year bond that has a face value of $1000 and a coupon rate of 5.5 %. a.) If the market interest rate on similar bonds is 5.5 %, the price of the bond is $ (Round your response to the nearest cent.) The bond's current yield is % (Round your response to two decimal places.) b.) Suppose that you purchase the bond, and the next day the market interest rate on similar...

A bond has a face value of $1,000, a coupon of 4% paid annually, a maturity...

A bond has a face value of $1,000, a coupon of 4% paid annually, a maturity of 28 years, and a yield to maturity of 9%. (1) What is the bond price today and (2) what rate of return will be earned by an investor who purchases the bond today and holds it for 1 year if the bond’s yield to maturity at the end of the year is 7%? a) $640.4 ; 29.58 % b) $640.4 ; 37.68 %...

Consider a coupon bond that has a face value of $1,000, a coupon rate of 4%,...

Consider a coupon bond that has a face value of $1,000, a coupon rate of 4%, and five years to maturity. What is the price of the bond if the yield to maturity on similar bonds is 6%? What should its price be the following year if the yield to maturity on similar bonds falls to 5%? Would this change in yields be a good thing or not if you purchased the bond one year earlier at the price you...

A bond has a face value of $1,000, a coupon of 4% paid annually, a maturity...

A bond has a face value of $1,000, a coupon of 4% paid annually, a maturity of 33 years, and a yield to maturity of 7%. What rate of return will be earned by an investor who purchases the bond for $617.39 and holds it for 1 year if the bond’s yield to maturity at the end of the year is 8%? The answer -15.82% is being marked as wrong please help!

2. Bond Valuation: You are analyzing a bond. The bond has a $1,000 face value, matures...

2. Bond Valuation: You are analyzing a bond. The bond has a $1,000 face value, matures in 10 years, and pays a 6.0% annual interest coupon payment. The bond pays interest semi-annually. a. What is the amount of interest (in dollars) you can expect to receive from this bond every six months? b. How many semiannual interest payments will you receive? c. If the bond sells for $1,025.00, what is the bond’s current yield to maturity (YTM)? Write your inputs...

You learned that XYZ, Inc. has a bond with $1,000 face value. The bond carries a...

You learned that XYZ, Inc. has a bond with $1,000 face value. The bond carries a 9% coupon, paid semiannually, and matures in 15 years. What is the fair market value of the bond if the yield to maturity is only 7%? (Round your answer to the nearest hundredth; two decimal places)

A. Bond A has the following features: Face value = $1,000, Coupon Rate = 4%, Maturity...

A. Bond A has the following features: Face value = $1,000, Coupon Rate = 4%, Maturity = 6 years, Yearly coupons The market interest rate is 4.05% If interest rates remain at 4.05%, what will the price of bond A be in year 1? B.Bond B has the following features: Face value = $1,000, Coupon Rate = 4%, Maturity = 4 years, Yearly coupons The market interest rate is 5.04% If interest rates remain at 5.04%, what is...

Subjects