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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?

Respuesta :

Answer:

The correct answer will be "7.84%".

Explanation:

The given values is:

Initial investment by bond holder

= $25.50

Now,

Expected payment after year will be:

= [tex]35\times 0.50+20\times 0.50[/tex]

= [tex]27.50[/tex]$

So,

Return will be:

= [tex]\frac{27.50-25.50}{25.50}\times 100[/tex]

= [tex]\frac{2}{25.50}\times 100[/tex]

= [tex]7.84[/tex]%

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