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The Isabelle Corporation rents prom dresses in its stores across the southern United States. It has just issued a five-year zero-coupon corporate bond at a price of $69 (assume a $100 face value bond). You have purchased this bond and intend to hold it until maturity. a. What is the yield to maturity of the bond? b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default? c. What is the expected return (expressed as an EAR) if there is a 100% probability of default and you will recover 90% of the face value? d. What is the expected return (expressed as an EAR) if the probability of default is 50% in good times, the likelihood of default is higher in bad times than good times, and, in the case of default, you will recover 90% of the face value? e. For parts (b-d), what can you say about the five-year risk-free interest rate in each case? Note: Assume annual compounding. a. What is the yield to maturity of the bond? The yield to maturity of the bond is %. (Round to two decimal places.) b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default? The expected return on your investment is %. (Round to two decimal places.) c. What is the expected return (expressed as an EAR) if there is a 100% probability of default and you will recover 90% of the face value? The expected return on your investment is %. (Round to two decimal places.) d. What is the expected return (expressed as an EAR) if the probability of default is 50% in good times, the likelihood of default is higher in bad times than good times, and, in the case of default, you will recover 90% of the face value? The expected return on your investment is %. (Round to two decimal places.) e. For parts (b-d), what can you say about the five-year risk-free interest rate in each case? The risk-free rate is in (b), in (c) and Vin (d). (Select from the drop-down menus.)

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