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How much should you be willing to pay for a bond?
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02-04-2012 3:38pm#1Hi,
I have a question and I just cant figure out how to do it.
I done the first question fine which was
" ABC Company borrows in the corporate bond market. The face value is €1000, the coupon rate is 5.8%, annually paid, and the term is 5 years. If the best rate an investor can get on an alternative investment is 2%, what is the most a rational agent will pay for this bond on the secondary market?"
I dont that one.
But its the second one that I have the problem with:
"Suppose it is considered that there is a 50% chance that the bond issuer in Q1 will default on the final payment, and will then pay out 25 cents in the euro, how much will a rational agent then pay for the bond? (Assume all coupon payments are met)"
Can anyone help me with that?
You can use different figures if you want to explain it!
Thanks
0
Comments
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Hi,
I have a question and I just cant figure out how to do it.
I done the first question fine which was
" ABC Company borrows in the corporate bond market. The face value is €1000, the coupon rate is 5.8%, annually paid, and the term is 5 years. If the best rate an investor can get on an alternative investment is 2%, what is the most a rational agent will pay for this bond on the secondary market?"
I dont that one.
But its the second one that I have the problem with:
"Suppose it is considered that there is a 50% chance that the bond issuer in Q1 will default on the final payment, and will then pay out 25 cents in the euro, how much will a rational agent then pay for the bond? (Assume all coupon payments are met)"
Can anyone help me with that?
You can use different figures if you want to explain it!
Thanks
Discount back the EPV of the redemption payment I'd imagine0
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