A Zero-Coupon Bond Has a Beta of 0

question 37

Multiple Choice

A zero-coupon bond has a beta of 0.15 and promises to pay $5,000 next year with a probability of 96%, $1,000 with a probability of 2%, and there is a 2% probability of total default. One-year Treasury securities are yielding 4%, and the expected return on the market is 10%.
-Refer to the information above. What is the time premium for this bond investment?

• A)5.3%
• B)4.0%
• C)6.0%
• D)5.4%

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Definitions:

Parameter

A numerical characteristic or measure that describes and summarizes a whole population.

Statistic

is a single measure, calculated from sample data, used to infer or describe properties of a population.

Significance Level

A threshold for determining whether a statistical result is considered statistically significant, usually denoted by alpha (α).

Statistical Inference

The process of drawing conclusions about population parameters based on data from a sample.