Q-10-271

Expert-verifiedFound in: Page 330

Book edition
9th

Author(s)
Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus

Pages
748 pages

ISBN
9780078034695

**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

n = 10,

PV = 900

FV = 1000

PMT = 140

Expected coupon payments = $70 annually

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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