A zero-coupon bond has a beta of 0.15 and promises to pay $5,000 next year with a probability of 96%, $1,000 with a probability of 2%, and there is a 2% probability of total default. One-year Treasury securities are yielding 4%, and the expected return on the market is 10%.
-Refer to the information above. What is the risk premium for this bond investment?

Question

Quizplus · Accepted Answer

The risk premium is calculated as the bond's beta multiplied by the market risk premium (expected market return minus risk-free rate). Here, it is 0.15 * (10% - 4%) = 0.9%.

A Zero-Coupon Bond Has a Beta of 0