Question

A 20-year bond of a firm in severe financial distress has a coupon rate of 13% and sells for $905. The firm is currently negotiating 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 is (a) the stated and (b) the expected yield to maturity of the bonds?

Answer 1

Answer:

(a) The Stated yield to maturity is 14.474%

(b) The Expected yield to maturity is 7.427%

Explanation:

(a) FV = Face value =  -$1,000.00

PV = Bond price =  $905.00

PMT = Coupon =  -$130.00

N = Years to mature x frequency =  20

CPT > I/Y = Rate =  14.4737

Yield to Maturity = Rate * Frequency /100 =  14.474%

Therefore, The Stated yield to maturity is 14.474%

(b) Coupon payment will become half of the precious = 130/2 = $65

FV = Face value =  -$1,000.00

PV = Bond price = $905.00

PMT = Coupon = -$65.00

N = Years to mature x frequency =  20

CPT > I/Y = Rate =  7.4267

Yield to Maturity = Rate * Frequency /100 =  7.427%

Therefore, The Expected yield to maturity is 7.427%.