Calculating the risk premium on bonds The text presents a formula where (1+) = (1-pX1+i+x)+ p(0) where i is the nominal interest rate on a riskless bond x is the risk premium p is the probability of default (bankruptcy) If the probability of bankruptcy is zero, the rate of interest on the risky bond is When the nominal interest rate for a risky borrower is 8% and the nominal policy rate of interest is 3%, the probability of bankruptcy is %. (Round your response to two decimal places.) When the probability of bankruptcy is 6% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) When the probability of bankruptcy is 11% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) The formula assumes that payment upon default zero. In fact, it is often positive. How would you change the formula this case? O A. The final term would become p "times" some fraction of (1+i+x). O B. The final term would become p "times" 1. O c. The final term would become some fraction of (1+i+ x). O D. The final term would become p "times" some fraction of /+x.

Calculating the risk premium on bonds The text presents a formula where (1+) = (1-pX1+i+x)+ p(0) where i is the nominal interest rate on a riskless bond x is the risk premium p is the probability of default (bankruptcy) If the probability of bankruptcy is zero, the rate of interest on the risky bond is When the nominal interest rate for a risky borrower is 8% and the nominal policy rate of interest is 3%, the probability of bankruptcy is %. (Round your response to two decimal places.) When the probability of bankruptcy is 6% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) When the probability of bankruptcy is 11% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) The formula assumes that payment upon default zero. In fact, it is often positive. How would you change the formula this case? O A. The final term would become p "times" some fraction of (1+i+x). O B. The final term would become p "times" 1. O c. The final term would become some fraction of (1+i+ x). O D. The final term would become p "times" some fraction of /+x.

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter11: Bond Pricing And Amortization (bonds)

Section: Chapter Questions

Problem 3R

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