A firm has 60% probability of being worth $100 million and a 40% probability of being worth $150 million. There is one bond outstanding that promises to pay $100 million at an interest rate of 4%. The cost of capital for the firm's projects is 8%.
-Refer to the information above. What is the promised return on the bond?

Question

Quizplus · Accepted Answer

The promised return on the bond is the interest rate stated on the bond, which is 4%. The probabilities of the firm's worth and the cost of capital for the firm's projects do not affect the promised return on the bond.

A Firm Has 60% Probability of Being Worth $100 Million