Question

The TrunkLine Company debtholders are promised payments of $35 if the firm does well, but will receive only $20 if the firm does poorly. If the bonds are selling at a price of $25, the promised return to the bondholders is approximately:

Answer 1

Answer: 40%

Step-by-step explanation:

From the question, we are informed that TrunkLine Company debtholders are promised payments of $35 if the firm does well, but will receive only $20 if the firm does poorly.

When the bonds are selling at a price of $25, the promised return to the bondholders will be calculated as:

= ($35/$25) - 1

= 1.4 - 1

= 0.4

= 40%