## investors are risk neutral, Finance Basics

Assignment Help:

At t = 0, a 3-year, 7% coupon corporate bond with face value \$1,000 is trading at a credit spread of 15%. The risk free rate is constant and equal to 4% for all maturities. The recovery rate on the corporate bond is 40% if a default occurs. At t = 0, the market believes that the probability of default in the first year, P1, is 20%, and the probability of default in the second year, P2, is 30%. Assume investors are risk neutral.

a)  At t = 0, what is the price of the bond?

b)  At t = 0, what is the market's belief about the default probability in the third year, P3?

c)  If you buy \$10,000 present value worth of the bond at t = 0, and you will liquidate the position at t = 1, what is the expected total amount of money you will have at t = 1? (Note: you may answer this question using a long way or a very short way.)

d)  Suppose the same company also has a 3-year zero coupon bond outstanding with face value \$500. The bond is junior to the previous bond, and the recovery rate is therefore 0%. What is the value of this junior bond at t = 0? (Hint: you need to use P1, P2, and P3.)

#### WACC, #The following is the existing capital structure of Company XYZ Ltd. ...

#The following is the existing capital structure of Company XYZ Ltd. Ordinary shares at Shs.10 par 1,000,000 Retained 800,000 12% preference shares Shs.10 par 400,000 16% loan Shs.

#### Significance of cost of finance, Significance of Cost of Finance The...

Significance of Cost of Finance The cost of capital is Significance since of its application in the following areas as: i) Long-term investment decisions - In capital b

#### Shareholder value creation in steel induster an eva analysis, what are the ...

what are the scopes of this study

#### Production, Pick a product of your choice and identify the stages of produc...

Pick a product of your choice and identify the stages of production

Math solution

#### Question 7.1, Assume the managers of Fort Winston Hospital are setting the ...

Assume the managers of Fort Winston Hospital are setting the price on a new outpatient service. Here are the relevant data estimates. Variable costs \$ 5.00 Annual fixed c

#### Profit analysis, The Audiology Department at Randall Clinic offers many ser...

The Audiology Department at Randall Clinic offers many services to the clinic’s patients. The three most common , along with cost and utilization data, are as follows: Service Var

#### Explain mechanics of security trading in stock exchange, Explain Mechanics ...

Explain Mechanics of security trading in Stock Exchange Introduction: An investor should have some knowledge of how the securities markets operate. Marketing of old or new se

#### What are the methods of underwriting, What are the Methods of Underwriting ...

What are the Methods of Underwriting An underwriting agreement may take any of the below three forms: (i) Standing behind the issue: Under this method, underwriter guarant

#### Accept or reject rule of npv, Accept or Reject Rule of NPV Under this ...

Accept or Reject Rule of NPV Under this method, a company should accept an investment venture if N.P.V. is positive that is if present value of cash outflows exceeds such of c