A company has a zero-coupon bond outstanding, with face value 1,000 and a 3 year...
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A company has a zero-coupon bond outstanding, with face value 1,000 and a 3 year maturity. The bond is risky with a beta of 0.7. The risk free rate is 2% and the market risk premium is 6%. There are two equally likely scenarios at maturity: in the ??first the bond will be fully repaid, in the second the company will be bankrupt and the bondholder will receive 800 from liquidating the assets, but they will have to bear all bankruptcy costs. The market value of the bond is 650.
How much are the bankruptcy costs born by bond holders in case of bankruptcy?
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