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Mr. Gregory White, Master's Degree

Category: Calculus and Above

Satisfied Customers: 5239

Experience: M.A., M.S. Education / Educational Administration

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7-You are considering purchasing a 3-year municipal bond

Customer Question

7-You are considering purchasing a 3-year municipal bond issued by the city of Chicago. The bond has a face value of $100,000 and pays an annual coupon of $5,000. The current interest rate is 2% per year. What expected present value would you place on the bond if the default rate is 1% per year?

8-What value would you place on the bond from question 7 if the default rate is 1% in the first year, 2% in the second year and 3% in the third year? The increasing probability of default results from the increasing difficulty of the city making the balloon payment of the principal in the final year.