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You buy a 1 year zero-coupon bond with a face value of $1,000 issued by...

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Finance

You buy a 1 year zero-coupon bond with a face value of $1,000 issued by the government of the country of Overspendania. You believe there is an 80% probability of the country going bankrupt in one year. In case of bankruptcy you expect to recoup only $600. The bond trades at $500. (a) How much is the expected repayment (cash flow to the bondholder) and the expected yield? (b) Calculate the promised yield.

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