You buy a very risky bond that promises a 30% coupon and return of the $1000 principle in 5 years. You pay only $900 for this bond.
a. You receive the coupon payments for 2 years and the bond defaults. After liquidating the firm, you receive a distribution of $150 at the end of 2.5 years. What is the realized return on your investment?
b. The firm does better than expected and you receive all of the promised interest and principle payments. What is the realized return on your investment?