A bond has an expected yield-to-maturity of 6% and an 8% probability of default. If the bond defaults, the bondholder should receive 80%of the market value. If fairly priced, the bond should have a promised yield-to-maturity of
A) 3.7%.
B) 9.2%.
C) 5.8%.
D) 8.3%.

Question

Quizplus · Accepted Answer

The promised yield-to-maturity should account for the probability of default and the recovery rate. The expected yield is 6%, and the bond defaults with an 8% probability, recovering 80% of its value. The promised yield should be higher than the expected yield to compensate for the risk of default, leading to a promised yield of 8.3%.

A Bond Has an Expected Yield-To-Maturity of 6% and an 8