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Unformatted text preview: + 100 (1 + x ) 2 + 100 (1 + x ) 3 + 100 (1 + x ) 4 + 100 (1 + x ) 5 + 1000 (1 + x ) 5 Solution is: x = 0 . 11365 3 B. Default Risk Two potential eﬀects of default risk of 70% on face value. It could either get reﬂected in the price or the YTM. 3.1 (a) Eﬀect on Price p = 100 1 . 11365 + 100 (1 . 11365) 2 + 100 (1 . 11365) 3 + 100 (1 . 11365) 4 + 70 (1 . 11365) 5 + 700 (1 . 11365) 5 Solution is: p = 757 . 36 3.2 (b) Eﬀect on YTM 950 = 100 1 + x + 100 (1 + x ) 2 + 100 (1 + x ) 3 + 100 (1 + x ) 4 + 70 (1 + x ) 5 + 700 (1 + x ) 5 Solution: x = 0 . 052152 Basically, if a price is ”pricing in” a default risk, the implicit rate of return must be larger. 4 B. Eﬃcient Market Hypothesis The Eﬃcient market hypothesis must be such that rates are expected to decline and then go up again....
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 Fall '11
 Aditi
 Interest, Corporate bonds, YTM, default risk

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