A zero-coupon bond has a beta of 0.1 and promises to pay $1,000 next year with a probability of 98%. If the bond defaults, it will pay nothing. One-year Treasury securities are yielding 5%, and the equity premium is 7%.
-Refer to the information above. What is the risk premium for this bond investment?
A)5.0%
B)2.9%
C)0.7%
D)5.7%

Question

Quizplus · Accepted Answer

The risk premium is calculated as the bond's beta multiplied by the equity premium: 0.1 * 7% = 0.7%.

A Zero-Coupon Bond Has a Beta of 0