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Question: A company has two bonds outstanding: Bond A has a maturity of 1 year and a face value of 3,000, bond B has the same maturity and a face value of 1,500. Bond A, though, has a higher seniority than Bond B. One year from now the company can be in a good state or in a bad state. If it is in a good state, its assets' value will be 4,250, while if it is in a bad state its assets' value will be 2,500. Both states are equally likely to happen. The risk-free interest rate is 4.50%, the market risk premium is 7%, and the two bonds bear no systematic risk. What is the value of the two bonds?

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