Question

Suppose that casino royale has issued bonds that mature in 1 year. They currently offer a yield of 20%. 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

Par value = 1000

Price of bond = 1000/(1+29%) =775.19

Expected Value of Bond = 50%*1000 +50%*0 = 500

The Expected yield = (500-775.19)/775.19 = -35.50%

Explanation: