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 renegot
iating 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
1 answer:
Answer:
13.91% and 7.45%
Explanation:
In this question, we use the RATE formula that is shown below:
In the first case,
Given that,
Present value = $900
Assuming figure - Future value or Face value = $1,000
PMT = 1,000 × 12% = $120
NPER = 10 years
The formula is shown below:
= Rate(NPER;PMT;-PV;FV;type)
The present value come in negative
So, after solving this, the yield to maturity is 13.91%
In the second case,
Given that,
Present value = $900
Assuming figure - Future value or Face value = $1,000
PMT = 1,000 × 12% ÷ 2 = $60
NPER = 10 years
The formula is shown below:
= Rate(NPER;PMT;-PV;FV;type)
The present value come in negative
So, after solving this, the yield to maturity is 7.45%
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