User Account

All Pages

Find the risk-neutral probability of default

Assignment Help Finance Basics
Reference no: EM132601634

(a) Consider a 12-year, 6% corporate bond with face value $4,000. Assume that the bond pays semi-annual coupons. Compute the fair value of the bond today if the nominal yield-to-maturity is 10% compounded semi-annually.

(b) One of the ways to value bonds issued by a corporation is to use the risk-neutral valuation model. Consider a 1-year zero-coupon bond issued by a pharmaceutical firm called Designer Drugs with a face value of $1,000 that is currently trading at $950.50. Suppose that if Designer Drugs defaults, the recovery rate of the bond is 65 percent. Assume that the annual risk-free interest rate is 3.5 percent.

(i) Find the risk-neutral probability of default.

(ii) Bloomberg just released news that a new drug to treat COVID-19 from Designer Drugs got approved by the government for large scale human testing. This event decreased the risk-neutral probability of default by 1 percent. In other words, if the probability of default was x percent in part (a), now it is going to be (x - 1) percent. At what price will the bond be trading after the news?

(iii) In addition to the information given in part (b) above, assume now that the risk-free interest rate is decreased from 3.5 percent to 3.0 percent. Find the price of the bond.

Reference no: EM132601634

Questions Cloud

Calculate the project-project k costs : Project K costs $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its WACC is 12%. Calculate the project's:
Income statement and a cash flow statement : "What is the difference between an income statement and a cash flow statement? Please also explain how each are used."
Should the trader go long or short futures : A trader takes a view that March KLSE CI futures which are currently trading at 1158.60 are about to enter a downtrend.
Local manufacturing plant of unsafe conditions : Iris Inspector works for OSHA. Iris receives a complaint from an employee at a local manufacturing plant of unsafe conditions.
Find the risk-neutral probability of default : Consider a 12-year, 6% corporate bond with face value $4,000. Assume that the bond pays semi-annual coupons.
Find the value of a 3-month european call option : Find the value of a 3-month European call option on the stock with an exercise or strike price equal to $100.
Analyze factors effecting change of valuation of currency : Analyze the factors effecting the change of valuation of currency. Amount of Gain or Loss due to change of Exchange rate for the company
Determining the interest on retirement savings : A couple will retire in 50 years; they plan to spend about $30,000 a year in retirement, which should last about 25 years.
Dealing with the great depression : The US was still dealing with the Great Depression, and conflict was intensifying between powers in Europe and between Japan

Reviews

Write a Review

Finance Basics Questions & Answers

  Financial reporting and analysis

Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..

  A report on financial accounting

This report is specific for a core understanding for Financial Accounting and its relevant factors.

  Describe the types of financial ratios

Describe the types of financial ratios and other financial performance measures that are used during venture's successful life cycle.

  Differences between sole proprietorship and corporation

Briefly describe the major differences between a sole proprietorship and a corporation

  Prepare a cash budget statement

Calculate the expected value of the apartment in 20 years' time. What is the mortgage loan repayment at the beginning of each month

  What are the implied interest rates

What are the implied interest rates in Europe and the U.S.?

  State pricing theory and no-arbitrage pricing theory

State pricing theory and no-arbitrage pricing theory

  Small business administration

Identify the likely stage for each venture and describe the type of financing each venture is likely to be seeking and identify potential sources for that financing.

  Effect of financial leverage

The Effect of Financial Leverage and working capital management

  Evaluate the basis for the payment to the lender

Evaluate the basis for the payment to the lender and basis for the payment to the company-counterparty.

  Importance of opps, ipps, mpfs and dmepos

Research and discuss the differences and importance of : OPPS, IPPS, MPFS and DMEPOS.

  Time value of money

Time Value of Money project

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd