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Question: Calculating the risk premium on bonds. The text presents a formula where 11 + i2 = 11 - p211 + i + x2 + p 102 p is the probability the bond does not pay at all (the bond issuer is bankrupt) and has a zero return. i is the nominal policy interest rate. x is the risk premium.
a. If the probability of bankruptcy is zero, what is the rate of interest on the risky bond?
b. Calculate the probability of bankruptcy when the nominal interest rate for a risky borrower is 8% and the nominal policy rate of interest is 3%.
c. Calculate the nominal interest rate for a borrower when the probability of bankruptcy is 1% and the nominal policy rate of interest is 4%.
d. Calculate the nominal interest rate for a borrower when the probability of bankruptcy is 5% and the nominal policy rate of interest is 4%.
e. The formula assumes that payment upon default is zero. In fact, it is often positive. How would you change the formula in this case?
In Research project 5.2 we described a set of data that had been collected by Jan Schwartzkopf. What numerical summaries can you use for this data?
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Also assume that CAPM holds and that the risk-free rate is 4% and the market risk premium is 8%. Suppose Starbucks' weighted average cost of capital is 10.6%. What is the required return on Starbucks' debt?
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It is time to launch. The Launch Pad phase is where the project is scoped, established, and launched. It is important to understand the role of communication and engagement because it will help determine comprehensive goals for a BPM project.
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