Bankruptcy costs

[max1]

Anyone that can help me with this one:

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?

 

[Deleted member 4993]

Anyone that can help me with this one:

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?

What are your thoughts?

Please share your work with us ...even if you know it is wrong

If you are stuck at the beginning tell us and we'll start with the definitions.

You need to read the rules of this forum. Please read the post titled "Read before Posting" at the following URL:

http://www.freemathhelp.com/forum/th...Before-Posting

 

[max1]

Anyone that can help me with this one:

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?

-> Bondholder are getting 800-x. X(bankruptcy cost)
-> capm=2%+0.7(6%-2%)= 4.8
-> 800/1.048^3=695.034
-> 800-695=105
-> BC = 105

But I`m really not sure if thats the right approach