A zero-coupon bond has a beta of 0.3 and promises to pay $1000 next year with...

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A zero-coupon bond has a beta of 0.3 and promises to pay $1000 next year with...

A zero-coupon bond has a beta of 0.3 and promises to pay $1000 next year with a probability of 95%. If the bond defaults, it will pay nothing. One -year Treasury securities are yielding 2%, and the equity premium is 5%. What is the default premium on this bond?

A. 5.4%

B. 3.5%

C. 3.0%

D. 1.5%

business finance

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Answer 1

Answer #1

d.1.5%.

default premium = beta of the bond * equity premium

=>0.30 * 5%

=>1.50%.

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Answer 2

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