Question

Assume CRT debtholders are promised payments in one year of $35 if the firm does well and $20 if the firm does poorly. There is a 50/50 chance of the firm doing well or poorly. If debtholders are willing to pay $25.50 today to purchase this debt, what is the promised return to those debtholders?

Answer 1

The correct answer will be "7.84%".

Step-by-step explanation:

The given values is:

Initial investment by bond holder

= $25.50

Now,

Expected payment after year will be:

=
`35* 0.50+20* 0.50`

=
`27.50`$

So,

Return will be:

=
`(27.50-25.50)/(25.50)* 100`

=
`(2)/(25.50)* 100`

=
`7.84`%