A corporate bond promises to pay $5,000 next year with a probability of 97%. If the
bond instead defaults, the bondholders will receive nothing. The beta of the bond is
0.2, the risk-free rate is 5.5%, and the expected return on the market is 11%. Calculate
the bond's promised rate of return and indicate how much of it is time premium,
default premium, and risk premium.

Question

Quizplus · Accepted Answer

The Answer of A corporate bond promises to pay $5,000 next year with a probability of 97%. If the
bond instead defaults, the bondholders will receive nothing. The beta of the bond is
0.2, the risk-free rate is 5.5%, and the expected return on the market is 11%. Calculate
the bond's promised rate of return and indicate how much of it is time premium,
default premium, and risk premium.

A Corporate Bond Promises to Pay $5,000 Next Year with a Probability