Consider a corporate bond with two years to maturity with coupon rate 10%, paid once a year, and par value of 1000. Assume that there is a probability of 1 that the first coupon will be paid and a probability of 75% that the second coupon and the par value will be paid. There is a 25% probability that the bond will pay 0 at the end of the second year. Assume that bonds with similar rating have an average YTM of 40%.
1. What is the bond’s price?
2. What is the expected realized yield of the bond, assuming that it is known that the interest rate will be 8% next year?