We appreciate your visit to Suppose that Casino Royale has issued bonds that mature in 1 year They currently offer a yield of 13 However there is a 50 chance. This page offers clear insights and highlights the essential aspects of the topic. Our goal is to provide a helpful and engaging learning experience. Explore the content and find the answers you need!
Answer :
Final answer:
The expected yield on the Casino Royale bonds considering a 50% chance of default and a stated yield of 13% if no default occurs is 6.5%, as you weigh the outcomes by their probabilities. So, the expected yield is 6.5%
Explanation:
To calculate the expected yield on the Casino Royale bonds that have a 50% chance of default, we must consider both the yield if the company does not default and the yield if the company does default. Given a yield of 13% when there's no default, and an assumption that bondholders will receive nothing in the event of default, the calculation is as follows:
If no default occurs (50% probability), the yield is 13%. If default occurs (50% probability), the yield is 0%. To find the expected yield, we calculate the weighted average:
- (0.50 * 13%) + (0.50 * 0%)
- 6.5% + 0%
- Expected yield = 6.5%
So the expected yield is 6.5% considering the 50% chance of default.
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