A small new car company issues a 5-year zero-coupon bond. You believe that there is a 8% chance that the company will go bankrupt in 5 years when it must repay all of its debt. (You also believe that the company will not go bankrupt before). If the company goes bankrupt investors will receive 60 cents per dollar owed. The appropriate discount rate, which takes into account the risk of car industry, is 2.8%.
(i) What is the price of the bond?
(ii) What is the yield to maturity of the bond?
(iii) If the 5-year risk-free rate is 1.8%, what is the yield spread?