Question

. Suppose a firm issued a 9% coupon bond (semiannual coupon) 20 years ago. The bond n ow has 10 years left until its maturity date. The bond is selling at $750. . But the firm is having financial difficulty. Investors believe that the firm will be able to ma ke good on the remaining interest rate payments but that at the maturity date, the firm w ill be forced into bankruptcy and bondholders will receive only 70% of par value. . Par value: stated ($1,000) vs. believed (70% x $1,000) . Calculate yields: Expected YTM Stated YTM Coupon payment $45 $45 Number of semiannual periods 20 periods 20 periods Final payment $700 $1,000 Price $750 $750 • Comparing yields: Expected YTM = ?, Stated YTM = ?

Answer 1

Expected yield

Using financial calculator

Inputs:- N = 20

PV = -750

Pmt = 45

FV = 700

I/y (Ytm) = compute

We get, ytm = 5.8151%, semi annual , 11.6303% annual

Stated yield

Using financial calculator

Inputs: N = 20

PV = -750

FV = 1,000

Pmt = 45

I/y (ytm) = compute

We get, ytm = 6.8285%, semiannual ; 13.6569% annual