Credit Risk. Suppose that Casino Royale has issued bonds that mature in 1 year. They currently offer a yield of 20%. However, there is a 50% chance that Casino will default and bondholders will...

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Extracted text: Credit Risk. Suppose that Casino Royale has issued bonds that mature in 1 year. They currently offer a yield of 20%. However, there is a 50% chance that Casino will default and bondholders will receive nothing. What is the expected yield on the bonds? Step-by-step solution L86% (7 ratings) for this solution Step 1 of 4 Credit Risk Investor stresses higher rate of return, when there is high anticipation that the borrower will run into default. Credit risk implies that the promised yield to maturity is higher than the anticipated yield. The difference between the assured yield and foreseeable yield is called default premium. The risk the bond issuer will run into insolvency is called credit risk or default risk.