Assignment Help - homework help

Short term inc has issued zero-coupon bonds that mature in


Short Term Inc. has issued zero-coupon bonds that mature in one year. The returns from holding these bonds have a beta of 0.25. There is a chance of 70% that the bonds will pay full value, and a chance of 30% that they will only be worth 60 cents for each dollar of face value. Assume that the CAPM holds, that the riskless rate is 5% and that the expected return on the market is 15%.

1. What is the current price of the bonds, per $100 face value?

2. What is the yield to maturity on the bonds?

3. What is the expected return on the bonds?

Solution Preview :

Prepared by a verified Expert
Financial Management: Short term inc has issued zero-coupon bonds that mature in
Reference No:- TGS01400539

Now Priced at $15 (50% Discount)

The current price of the bond, the required rate of return and the YTM of the zero coupon bond has to be calculated with the information that is provided in the question. The face value of the bond is 100, and there is 70% probability that it will give 100 on maturity else there is a probability of 30% that it will be worth $60. The required rate of return has been calculated using CAPM.

Recommended (97%)

Rated (4.9/5)