It is the heart of the financial crisis and lehman brothers, Ask an Expert

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It is the heart of the financial crisis and Lehman brothers is trying to raise money. They issue a zero-coupon bond with a face value of $1000 and a term of 1 year. However, you expect that Lehman will go bankrupt with probability 75%, in which case you get $0 in one year rather than the full $1000. Only with probability 25% do you receive the full $1000. If Lehman has an opportunity cost of capital of 20%, how much are you willing to pay for the bond? What is the yield-to-maturity of the bond?

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