Taggart Transcontinental has issued at par a zero-coupon bond with a ten-year maturity. Investors believe there is a 10% chance that Taggart Transcontinental will default on these bonds. If they do default, investors expect to receive only 50 cents per dollar they are owed. If investors require an 8% return on their investment in these bonds, then the yield to maturity on these bonds will be
closest to (assume annual compounding):
A) 6.0%
B) 6.5%
C) 7.0%
D) 8.0%
B
Explanation: B) Step #1 Price = (.90 × $1000 + .10 × $500)/(1.06)10 = $530.457
Step #2 FV = 1000, PMT = 0, N = 10, PV = -530.475, compute I = 6.455107
Business
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