A corporate bond matures in one year. The bond promises a coupon of $50 and principal of $1,000 at maturity. If the bond has a 10 percent probability of default and payment under default is $400, calculate the expected payment from the bond.

Question

Quizplus · Accepted Answer

Expected payment = Probability of no default * Payment under no default + Probability of default * Payment under default
Probability of no default = 1 - Probability of default = 1 - 0.1 = 0.9
Expected payment = 0.9 * ($1,000 + $50) + 0.1 * $400
Expected payment = $985

A Corporate Bond Matures in One Year