What is the borrowing rate

Assignment Help Financial Management
Reference no: EM131308172

If there is a probability p of default on a bond, then the following equation: 1 + i = (1 – p)(1 + i + x) + p.(0) relates x, the risk premium on the bond, to p and i, the riskless rate of interest. Use this equation to solve the following:

a. If the probability of default is 2% (0.02), and the riskless rate is 3%, what is the borrowing rate (where the borrowing rate is the riskless rate plus the risk premium)?

b. If the borrowing rate is 10%, and the riskless rate is 2%, what is the probability of default?

c. If the probability of default is 4%, and the borrowing rate is 8%, what is the riskless rate?

Reference no: EM131308172

Questions Cloud

When he ceases to withdraw funds from the account : Dr. A. Sanchez has $300,000 invested at 7.5%, and he now wants to retire. He wants to withdraw $35,000 at the end of each year, starting at the end of this year. He also wants to have $25,000 left to give his friend Dr. J. Mourinho when he ceases to ..
Company to make equal semi-annual payments forever : Fairfax Paint just borrowed 61,900 dollars. The terms of the loan require the company to make equal semi-annual payments forever. The first semi-annual payment is due in 6 months. If the regular semi-annual loan payment is 4,650 dollars, then what is..
Expected to produce annual cash flows forever : Bond A has a coupon rate of 4.49 percent, a yield-to-maturity of 4.06 percent, and a face value of 1,000 dollars; matures in 16 years; and pays coupons annually with the next coupon expected in 1 year. Cy owns investment A and 1 bond B. The total val..
Identifying the risk and return relationship : To determine how well an investment is doing, it is important to take into account its return and risk. Rational investors seek to obtain the highest amount of return from an investment with the least amount of risk. The CAPM and the arbitrage pricin..
What is the borrowing rate : If there is a probability p of default on a bond, then the following equation: 1 + i = (1 – p)(1 + i + x) + p.(0) relates x, the risk premium on the bond, to p and i, the riskless rate of interest. If the probability of default is 2% (0.02), and the ..
Firms use more debt in capital structure than other firms : It can be difficult to accurately forecast a project's cash flows because many risk factors may be present. As an analyst, what will you do to increase the accuracy of the project's cash flow forecasts? Some firms use more debt in their capital struc..
What are the terminal cash flows and net cash flows : The Cosmo K Manufacturing Group currently has sales of $1,400,000 per year. It is considering the addition of a new office machine, which will not result in any new sales but will save the company $105,500 before taxes per year over its 5-year useful..
Loan by making equal quarterly payments : Holly just borrowed 30,767 dollars from the bank. She plans to repay this loan by making equal quarterly payments for 6 years. If the interest rate on the loan is 15.36 percent per year and she makes her first quarterly payment in 3 months from today..
Dollars in investment account and retirement account : Tim wants to have 257,897 dollars in his investment account in 7 years from today. He expects to earn a return of 9.57 percent per year in that account. Tim plans to make regular, equal savings contributions of X per year to his account for 7 years, ..

Reviews

Write a Review

Financial Management Questions & Answers

  Foreign company acquisition

Acquisition by a foreign company and the effects of that decision and the results of foreign exchange in Euro and the exchange rate differences.

  Financial management for profit and non profit organizations

In this essay, we are going to discuss the issues of financial management in a non-profit organisation.

  Method for estimating a venture''s value

Evaluate venture's present value, cash and surplus cash and basic venture capital.

  Replacement analysis

This document show the Replacement Analysis of modling machine. Is replacement give profit to company or not?

  Business finance task - capital budgeting

Your company is considering using the payback period for capital-budgeting. Discuss the advantages and disadvantages of this technique.

  Analysis of the investment

In this project, you will focus on one of these: the additional cost resulting from the purchase of an apple press (a piece of equipment required to manufacture apple juice).

  Conduct a what-if analysis

Review the readings and media for this unit, including the Anthony's Orchard case study media. Familiarise yourself with the Anthony's Orchard company and its current situation.

  Determine operational expenditures

Organisations' behaviour is guided by financial data. In the short term, such data will help determine operational expenditures; in the long term, historical data may help generate forecasts aimed at determining strategic plans. In both instances.

  Personal financial management

How much will you have left over each half year if you adopt the latter course of action?

  Sources of finance for expansion into new foreign markets

A quoted company is considering several long-term sources of finance for expansion into new foreign markets.

  Long term financial planning

This assignment is designed for analyze Long term financial planning begins with the sales forecast and the key input in the long term fincial planning.

  Explain the role of fincial manager

This assignment explain the role of fincial manager, function of manger. And what are the motives of financial manager.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd