A corporate bond has one-year maturity. The bond pays an interest of $50 and principal of
$1,000 at the time of maturity. If the bond has 10% probability of default and payment under default is $400, calculate the expected payment from the bond.

Question

Quizplus · Accepted Answer

The expected payment from the bond would be calculated as follows:
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 - 0.10 = 0.90
Expected payment = (0.90 * $1,050) + (0.10 * $400) = $945 + $40 = $985
Therefore, the best choice is C.

A Corporate Bond Has One-Year Maturity