Question: 1. What is a "Corporate Bond"? Give a short explanation.
2. Corporate bond yields are usually higher than government bond yields with similar characteristics. Explain.
3. Suppose you have a 6% coupon bond that matures in 2 years from now. The principal is 1,000. The bond currently trades at 930.58. Assume that the risk-free rate is 2%.
a. What is the promised yield to maturity?
b. How large is the risk premium?
c. How much would it cost you to insure this bond against default today (assume a fair deal)?
d. What is the probability of default p? Assume that the default might only occur within the next year.
e. Show that the expected profit from selling insurance against default is 0.