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Calculate the expected return on bond on annual basis

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Reference no: EM133074433

You are considering buying a risky bond. The bond has a $1,000 face value, a 5-year maturity, and a coupon rate of 12%. Coupon payments are made annually. You believe the probability the company will survive to pay off the bond is 75%. You also believe there is a 25% probability the company will default within 2 months, in which case you will be able to recover 30% of the bond's face value at the end of year 5. The bond is selling for $850.

-Calculate the expected return on this bond on an annual basis.

-Use Goal Seek or Solver (identify which you choose) to determine the probability of survival that would yield an expected annual return of 10%.

-Use Goal Seek or Solver (identify which you choose) to determine the coupon rate that would yield an expected annual return of 12%.

Reference no: EM133074433

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