Compute the Promised Yield to Maturity and Expected Return to Maturity

question 18

Short Answer

Compute the promised yield to maturity and expected return to maturity on a default-risky 5-year pure-discount corporate bond that has a current price of $541.With a probability of 0.7, the issuer will repay the principal of $1,000 at maturity.However, the probability is 0.3 that the issuer will default, in which case bondholders will receive only $500 per bond.
$\begin{array}{l}&\text { Promised } & \text { Exp. Ret. }\\& \text { Yield } & \text { to Mat. } \\\text { a. } & 17.63 \% & 13.06 \% \\\text { b. } & 17.63 \% & 9.46 \% \\\text { c. } & 13.06 \% & 9.46 \% \\\text { d. } & 13.06 \% & 3.30 \%\end{array}$

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Definitions:

Direct Materials

The raw materials that are directly traceable to the manufacturing of a product.

Direct Labour

The workforce directly involved in producing goods or delivering services, whose costs are directly attributable to the products or services.

Manufacturing Overhead

All manufacturing costs except direct materials and direct labor.