It is the heart of the financial crisis and Lehman brothers is trying to raise money....

60.1K

Verified Solution

Question

Finance

It is the heart of the financial crisis and Lehman brothers istrying to raise money. They issue a zero-coupon bond with a facevalue of $1000 and a term of 1 year. However, you expect thatLehman will go bankrupt with probability 75%, in which case you get$0 in one year rather than the full $1000. Only with probability25% do you receive the full $1000. If Lehman has an opportunitycost of capital of 20%, how much are you willing to pay for thebond? What is the yield-to-maturity of the bond?
A. $208.33 ; 20%
B. $208.33 ; 380%
C. $833.33 ; 20%
D. $833.33 ; 380%

Answer & Explanation Solved by verified expert

4.1 Ratings (522 Votes)

See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

It is the heart of the financial crisis and Lehman brothers istrying to raise money. They issue a zero-coupon bond with a facevalue of $1000 and a term of 1 year. However, you expect thatLehman will go bankrupt with probability 75%, in which case you get$0 in one year rather than the full $1000. Only with probability25% do you receive the full $1000. If Lehman has an opportunitycost of capital of 20%, how much are you willing to pay for thebond? What is the yield-to-maturity of the bond?A. $208.33 ; 20%B. $208.33 ; 380%C. $833.33 ; 20%D. $833.33 ; 380%