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Suppose you are thinking of investing on a Corporate bond that has a potential to go into default. It promises to pay $80.00

I only need part (c) and if possible the questions after it

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Answer #1

Answer:

We would be ready to pay the amount which would amount to same yield as of $ - year US bond

Calculation of YMT of 4 - Year US bond

YTM = [Annual interest + (par value - bond price)/years till maturity]/(par value + bond price)/2

=[40+(1000 - 964.54)/4]/1000 + 964.54)/2

=4.97%

Calculation of price of corporate bond

Expected interest = Probability*amount + probability *amount = 80*0.70 + 40*0.30 = $68

Expected face value at year 4 = probability*amount+probability*amount = 1000*0.70+500*0.30 = $850

Price of bond at YTM 4.97%

= Interest 1/(1+YTM)+interest2/(1+YTM)^2+Interest3/(1+YTM^3+(FV+Interest4)/(1+YTM)^4

= 68/1.0497+68/(1.0497)^2+68/(1.0497)^3+(850+68)/(1.0497^4

= 64.78+61.71+58.79+756.10

Price of bond =$941.38

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