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Q-10-271

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Essentials Of Investments
Found in: Page 330
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

Question: A 10-year bond of a firm in severe financial distress has a coupon rate of 14% and sells for $900. The firm is currently renegotiating the debt, and it appears that the lenders will allow the firm to reduce coupon payments on the bond to one-half the originally contracted amount. The firm can handle these lower payments. What are the stated and expected yields to maturity of the bonds? The bond makes its coupon payments annually.

Answer

Expected YTM = 8.526

Stated YTM = 16.075

See the step by step solution

Step by Step Solution

Step 1: Given information

n = 10,

PV = 900

FV = 1000

PMT = 140

Expected coupon payments = $70 annually

Step 2: Calculation of the YTM

Yield to Maturity = [Annual Interest + {(FV - Price)/Maturity}] / [(FV + Price)/2]

= (70 + 1000 – 900/ 140) / (1000 + 900) /2

= Expected YTM = 8.526

Therefore the stated YTM = 16.075

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