A corporate bond matures in one year.The bond promises a $50 coupon and a principal payment of $1,000 at maturity.If the bond has a 15 percent probability of default and payment under default is $400, calculate the expected payment from the bond.

Question

Quizplus · Accepted Answer

The expected payment can be calculated as:

(Probability of no default * payment under no default) + (Probability of default * payment under default)
= (0.85 * $1,050) + (0.15 * $400)
= $892.50 + $60
= $952.50

Therefore, the expected payment from the bond is $952.50.

A Corporate Bond Matures in One Year