A local radio station issues a one-year zero-coupon bond. The face value is 1,000. You believe that the probability of bankruptcy is 4%. If the company goes bankrupt investors will receive 50 cents per dollar owed. The appropriate discount rate (taking into account the risk of the investment) is 2%.
(i) What is the price of the bond?
(ii) What is the yield to maturity of the bond?
(iii) If the 1-year risk-free rate is 1%, what is the yield spread?