If someone coule help me answer the question above, that has not been answered,

Question

If someone coule help me answer the question above, that has not been answered, it would be much appreciated.

XText Problem8 Calculating the risk premium on bonds The text presents a formula where where is the nominal interest rate on a riskless bond x is the risk premium p is the probability of default (bankruptcy) If the probability of bankruptcy is zero, the rate of interest on the risky bond is i When the nominal interest rate or a nsky borrower is 15% and the nominal pol cy rate of interest is 4%, the prbabiity of bankruptcy is 95 When the probability of bankruptcy is 2% and the nominal policy rate of interest is 5%, the nominal interest rate for a risky borrower is 9 % Round your response to two decimal paces.) Round your response to two decimal places.

Explanation / Answer

The two is are confusing!

(1 + i) = (1 - p) (1 + i + x) + p(0)

If the probability of bankruptcy is 0, p = p(0) = 0

=> 1 + i = 1 + i + x

=> i = i + x.

The answer is i + x.

i + x = 0.15 i = 0.04

=> 1 + 0.04 = (1 - p) (1 + 0.15) + 0

=> 1.04 = (1 - p) 1.15

=> 1 - p = 1.04 / 1.15

=> 1 - p = 0.9043

=> p = 1 - 0.9043

=> p = 0.0957 or 9.57%.

(This answer should have been correct. Try entering 9.56%.)

p = 0.02 i = 0.05

=> 1 + 0.05 = (1 - 0.02) (1 + i + x) + 0

=> 1.05 = 0.98 (1 + i + x)

=> 1 + i + x = 1.05 / 0.98

=> 1 + i + x = 1.0714

=> i + x = 1.0714 - 1

=> i + x = 0.0714

=> i + x = 7.14%.

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