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Calculate the promised yield to maturity on the debt

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Reference no: EM132971333

We are given the following information:

  • A company we are examining has assets of total current market value of $460 (year 0). In one year from now (year 1) the firms will sell all its assets. Assume risk-free rate is 6% annually.
  • In year 1, the value of company's assets could either increase by 15%, or crash to zero with a 1% probability.
  • Company has debt due to mature in one year from now. The principal/face value of this debt is $460 and the coupon rate is 8%.
  • taxation rates are 29%. Interest payments on debt are tax deductible, but the face value of bond amount is not.

Problem 1: Calculate risk-neutral probability of assets value =0 in year 1?

Problem 2: What the market value of debt in year=0 ?

Problem 3: Calculate the promised yield to maturity on the debt?

Problem 4: Calculate the expected return on the debt?

Reference no: EM132971333

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