Answer Happy

4 Bond Values, Yields and Interest Rates Suppose a 1 dollar bond with 1 year maturity has a 1 dollar face value and is trading at a 33 percent discount. What is the market value of the bond? The contractual interest rate is 8 percent. What is the effective nominal yield on the bond? Now suppose a bond with 1 year maturity has a face value of d dollars (including prin- cipal and interest). There is a probability of 33 percent that the bond issuer (borrower) will default completely. Otherwise, the issuer will pay in full. What is the market value of the bond? The contractual interest rate is 8 percent. What is the effective nominal yield on the bond? Suppose the default probability increases to 50 percent. What is the market value v² of the bond now? At a contractual interest rate of 8 percent, what is the effective nominal yield on the bond now? Consider an investor. There are two bonds. One pays v' with 100 percent certainty. The other bond pays d with a 50 percent chance, and zero otherwise. Which bond, if any, will the investor prefer?