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Connect html my work mode: This shows what is correct or incorrect for the work you have completed so far. it does not indicate completion. Return to qu Ion Suppose that Casino Royale has issued bonds that mature in 1 year They currently offer a yield of 17%. However there sa chance that Casino will default and bondholders will receive n zero coupon bonds with annual compounding (Input the amount as a positive value and as a percent rounded to 1 decimal place. othing What is the expectedyneld on the bonds? Assume these are 3 Answer is not complete. Expected yieid is loss Next > Prey 13 of 25 earch

Explanation / Answer

Assume the bond has a face Value of $1,000.
A $1,000 par value bond, issued for one year, with an expected yield of 17% will produce a cash flow of $1,700 at the end of the year.
There is only a 50% chance that investors will get the full $1,700 else they get 50% chance of getting nothing. Thus expected cash flow = 0.50 x 1700 + 0.50 x 0 = $850.
If the expected cash flow is only 50%, or $850, the expected return is a loss of 15%.

Assume the bond has a face Value of $1,000.
A $1,000 par value bond, issued for one year, with an expected yield of 17% will produce a cash flow of $1,700 at the end of the year.
There is only a 50% chance that investors will get the full $1,700 else they get 50% chance of getting nothing. Thus expected cash flow = 0.50 x 1700 + 0.50 x 0 = $850.
If the expected cash flow is only 50%, or $850, the expected return is a loss of 15%.

Return = (850-1000)/1000 -15%

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