Holly Berry Incorporated debtholders are promised payments of $25 if the firm does well,but will receive only $20 if the firm does poorly. Bondholders are willing to pay $15. The promised return to the bondholders is approximately:
A) 5.65%
B) 45.65%
C) 50.00%
D) 66.67%
E) 100.00%

Question

Quizplus · Accepted Answer

The promised return is calculated as (Promised Payment - Price Paid) / Price Paid. If the firm does well, the return is ($25 - $15) / $15 = 66.67%.

Holly Berry Incorporated Debtholders Are Promised Payments of $25 If