6. (10 extra credit points) GameStart, Inc., has risky debt outstanding. The only debt the company has is a $1 billion f

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6 10 Extra Credit Points Gamestart Inc Has Risky Debt Outstanding The Only Debt The Company Has Is A 1 Billion F 1 (161.07 KiB) Viewed 34 times

6. (10 extra credit points) GameStart, Inc., has risky debt outstanding. The only debt the company has is a $1 billion face value, zero coupon bond, maturing in one year. The market price of the bond is $769 million. a. What is the yield to maturity on GameStart's risky bond? b. Suppose there are two possible "outcomes" for GameStart one year from now. In the "non default” outcome, which has probability of 70%, the bondholders receive the entire $1 billion face value on the debt. In the "default" outcome, which has probability of 30%, the bondholders expect to only receive 50 cents per dollar of face value. What is the expected value of the payoff to bondholders in one year? c. What is the expected rate of return on the GameStart bonds? d. The risk free interest rate is 4% and the market risk premium is 8%. Given your answer to c, what is the beta of the GameStart bonds?