A Bond Has an Expected Yield-To-Maturity of 8% and a 10

question 33

Multiple Choice

A bond has an expected yield-to-maturity of 8% and a 10% probability of default. If the bond defaults, the bondholder should receive 80% of the market value. The bond would be fairly priced if its default premium were

• A) 2.4%.
• B) 6.2%.
• C) 3.1%
• D) 5.4%.

---

Definitions:

M2

An indicator of the monetary base that encompasses cash, deposits in checking accounts, and readily convertible quasi-cash assets.

Money Supply

The collective amount of all financial means in an economy, considering cash, coins, and deposits in checking and savings accounts, at a specific moment.

Backed by Gold

Refers to a currency that is guaranteed by gold reserves, meaning its value is supported by the amount of gold held by the issuing authority.

Paper Currency

Money in the form of paper notes issued by the government or central bank, representing a legal tender for transactions.