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CHAPTER_23 - assets with an exercise price equal to the...

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1 CHAPTER 23 Credit Risk and the Value of Corporate Debt Answers to Problem Sets 1. Promised yield = 12.72%; expected yield = 9.37%. 2. a. Increase b. Increase 3. Put option on company’s assets with an exercise price equal to the face value of the bond. 4. A’s probability is .0058, or .58%. B’s is worse at .015, or 1.5%. 5. The expected growth in the market value of the assets, the face value and maturity of the debt, and the variability of future asset values. (In practice, compromises need to be made if, for example, the company has issued bonds with different maturities.) 6. 73.02% (from Table 23.4); 8.85%. 7. Both bonds are more likely to be down rated. 14. We can consider the value of equity to be the value of a call on the firm’s
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