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A zero-coupon bond has a beta of 0.3 and promises to pay $1000 next year with...

A zero-coupon bond has a beta of 0.3 and promises to pay $1000 next year with a probability of 95%. If the bond defaults, it will pay nothing. One -year Treasury securities are yielding 2%, and the equity premium is 5%. What is the time premium for this bond investment?

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Answer #1

Time premium for zero coupon bond is the return expected for the defined time period from that bond.

Calculation of time premium for bond investment

= 1000*95%*(2% + 0.3*(5%))

= 33.25

Hence, time premium for the zero coupon bond investment is $33.25

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