If the bond has 15% 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 = 100% - 15% = 85%
Payment under no default is not given, but we can assume it to be the face value of the bond, say $1,000.
Therefore, expected payment = (0.85 * $1,000) + (0.15 * $400) = $952.50.

If the Bond Has 15% Probability of Default and Payment