5.51 Corporate bonds A simple way for a company to raise money to fund its operations is by selling corporate bonds. Suppose an investor buys a bond from a company for $7500. As part of the terms of the bond, the company will repay the investor $2000 at the end of each of the next five years. It seems like a good deal for the investor; the problem, however, lies in the fact that the company may not be able to afford to make the bond payments. In such a case, the company is said to default on the issue of the bond. Suppose that the probabilities of default in each of the next one-year periods 0.09 and that defaulting is independent from one year to the next. What is the probability the company does not default during the five-year term of the bond? are 0.05, 0.07, 0.07, 0.07, and

Question
5.51 Corporate bonds A simple way for a company to raise
money to fund its operations is by selling corporate bonds.
Suppose an investor buys a bond from a company for
$7500. As part of the terms of the bond, the company will
repay the investor $2000 at the end of each of the next
five years. It seems like a good deal for the investor; the
problem, however, lies in the fact that the company may
not be able to afford to make the bond payments. In such
a case, the company is said to default on the issue of the
bond. Suppose that the probabilities of default in each of
the next one-year periods
0.09 and that defaulting is independent from one year to
the next. What is the probability the company does not
default during the five-year term of the bond?
are 0.05, 0.07, 0.07, 0.07, and

Image Transcription

5.51 Corporate bonds A simple way for a company to raise money to fund its operations is by selling corporate bonds. Suppose an investor buys a bond from a company for $7500. As part of the terms of the bond, the company will repay the investor $2000 at the end of each of the next five years. It seems like a good deal for the investor; the problem, however, lies in the fact that the company may not be able to afford to make the bond payments. In such a case, the company is said to default on the issue of the bond. Suppose that the probabilities of default in each of the next one-year periods 0.09 and that defaulting is independent from one year to the next. What is the probability the company does not default during the five-year term of the bond? are 0.05, 0.07, 0.07, 0.07, and

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