Business, 29.11.2020 14:50 imcool666

A company has zero-coupon bonds outstanding that mature one year from today and have a face value of $500. The bonds do not include any covenants that restrict the company from issuing additional debt, even if this additional debt is of higher seniority than the existing bonds. The company will realize all of its cash flow next year. This cash flow will be $200 with probability 1/3, $600 with probability 1/3, and $1,000 with probability 1/3. The company is planning to issue new bonds with a face value of $200 that will be senior to the old debt and that will also be due in one year. Assume for simplicity that the risk-free rate and market risk premium are zero (so there is no discounting, and thus the value of a claim today is equal:.

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A company has zero-coupon bonds outstanding that mature one year from today and have a face value of...

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