Question

2. Suppose a firm issued a 10% coupon bond (annual coupon) 10 years ago. The bond now has 5 years left until its maturity date, but the firm is having financial difficulties. Investors believe that the bond will make the remaining coupon payments but will pay off only 60% of face value at maturity. The face value of the bond is $1,000 and the bond is currently selling at $800. What are the promised and expected yield to maturity of this bond, respectively? (Round to basis points.)

Answer 1

Promised yield Annual coupon payment/ Bond's current selling price Annual coupon payment Bond's current selling price Promised yield $100 [$1,000 x 10%) $800 12.50% [$100 / $800] # of years left to maturity, NPER Annual coupon Payment, PMT Bond's initial purchase price, PV Bond's maturity value at the end, FV Annual coupon type, TYPE Bond's expected yield to maturity $100 [$1,000 x 10%) $800 [Given] $600 [$1,000 x 60%) 0 =0lf coupons paid at the end of each semiannual; 1 if coupons paid at the beginning of each semiannual 8.26% [Ref: NOTE NOTE Bond's expected yield to maturity is calculated using EXCEL FUNCTION RATE nper,pmt,pv.fv,type) where nper:5; pmt-100, pv-800; fv=-600, Here, value for pmt & fv are negative figures as they denote cash inflows; Value for pv is positive as it denotes cash outflow; type 0 as coupon are paid at the end of each yearl only I #Of years left to maturity, NPER 2 Annual coupon Payment, PMT 3 Bond's initial purchase price, PV 4 Bond's maturity value at the end, FV 5 Annual coupon type, TYPE 6 Bond's expected yield to maturity -RATE(B1,-B2,B3,-B4,B5)[Ref: NOTE] 1000*10% [$1,000 x 10%) $800 [Given] -1000*60% [$1,000 x 60%) 0 0 if coupons paid at the end of each semiannual; 1 if coupons paid at the beginning of each semiannual