You are evaluating a one year zero coupon bond, which you estimate has a 6 percent...
You are evaluating a one year zero coupon bond, which you estimate has a 6 percent default probability. The current risk free rate is 2 percent. In case of default, similar bonds usually recover 31 pennies on the dollar owed. What rate of return would you require, at a minimum, on this investment?
Enter the answer in percents, accurate to two decimal places.
Homework Answers
Required rate of return = Risk free rate + Default percentage * Loss%
= 2% + (6% * 69%)/(1 - 6%)
= 2% + 4.41% = 6.41%
Loss% = (100-31)/100 = 69%
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