Problem:
Grummon Corporation has issued zero-coupon bonds with five-year maturity. Investors believe there is a 20% chance that Grummon will default on these bonds. If Grummon does default, investors expect to receive only 50 cents per dollar they are owed.
Required:
Question: If investors require a 6% expected return on their investments in these bonds, what will be the price and the yield to maturity on these bonds?
Note: Show supporting computations in good form.