Question

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 that casino will default and bondholders will receive nothing. what is the expected yield on the bonds?

Answer 1

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%

Step-by-step 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.