Ed's Sheds has a $1,250 pure discount bond that comes due in 1 year.The risk-free rate of return is 3.1 percent.The firm's assets are expected to be worth either $1,100 or $1,500 in 1 year.Currently,these assets are worth $1,360.What is the current value of the firm's debt?

Question

Quizplus · Accepted Answer

Number of options needed = ($1,500 - $1,100)/ ($250 - $0)= 1.6 $1,360 = 1.6C₀ + $1,100 / 1.031 C₀ = $183.17 Value of debt = $1,360 - $183.17 = $1,176.83

Ed's Sheds Has a $1,250 Pure Discount Bond That Comes