A corporate bond matures in one year. The bond promises a $50 coupon and principal of $1,000 at maturity. Suppose the bond has a 10 percent probability of default and payment under default is $400. If an investor buys the bond for $907.14, calculate the promised yield on the bond.

Question

Quizplus · Accepted Answer

The promised yield is calculated by solving for the yield (YTM) in the equation: $907.14 = ($50 + $1,000) / (1 + YTM). Solving this gives a YTM of approximately 15.75 percent.

A Corporate Bond Matures in One Year