Question

Suppose that Casino Royale has issued bonds that mature in 1 year. They currently offer a yield of 27%. However, there is a 50% chance that Casino will default and bondholders will receive nothing. What is the expected yield on the bonds? (Input the amount as a positive value and as a percent rounded to 1 decimal place.) Expected yield is a of

Answer 1

Let bond price = $1,000 There is a 50% chance that would be have an expected cashflow of $1,270 ($1,000+27% of 1000) and there's a 50% chance of receiving 0 at the end of year. Expected cashflow=($1,270 * 0.50) + (0 * 0.50) = $635 Return = ($635 - $1,000)/$1,000 = -36.5% Expected yield is a loss of 36.5%