A Firm Has a Single Issue of a Zero Coupon

question 5

Multiple Choice

A firm has a single issue of a zero coupon debt that promises to pay $90 in 4 years,and the A₀ = $100,r = 4%,σ = 25%,and δ = 0.If the asset has a 2% chance of total default,what is the value of the debt?

• A) $67.10
• B) $75.19
• C) $85.62
• D) $90.00

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Definitions:

Short-swing Profits Rule

A regulation intended to prevent insider trading by requiring company insiders to return any profits made from the purchase and sale of company stock within a six-month period.

1934 Act

The Securities Exchange Act of 1934, which governs the trading of securities in the U.S., establishes the Securities and Exchange Commission (SEC), and mandates reporting by publicly traded companies.

Short-swing Profits Rule

A regulation intended to prevent insiders of a company from taking advantage of non-public information for quick financial gains by buying and selling their own company's stock within a six-month period.

Civil Liability

Legal responsibility for actions or omissions that cause harm or injury to another individual, subject to financial compensation rather than criminal penalties.