A risky bond has a $1,000 face value, a 3-year maturity, and a coupon rate of 6%. The probability the company will survive to pay off the bond is 95%. You also believe there is a 5% probability the company will default within the first 2 months, in which case you will be able to recover 55% of the bond’s face value at the end of year 3. The bond is selling for $935. What is the annual expected return?
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
A risky bond has a $1,000 face value, a 3-year maturity, and a coupon rate of 6%. The probability the company will survive to pay off the bond is 95%. You also believe there is a 5% probability the company will default within the first 2 months, in which case you will be able to recover 55% of the bond’s face value at the end of year 3. The bond is selling for $935.
What is the annual expected return?
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