the trunkline company will earn $60 in one year if it does well. the debtholders are promised payments of $35 in one year if the firm does well. if the firm does poorly, expected earnings in one year will be $30 and the repayment will be $20 because of the dead weight cost of bankruptcy. the probability of the firm performing poorly or well is 50%. if bondholders are fully aware of these costs what will they pay for the debt? the interest rate on the bonds is 10%.
