A 12-year bond of a firm in severe financial distress has a coupon rate of 12% a
ID: 2652720 • Letter: A
Question
A 12-year bond of a firm in severe financial distress has a coupon rate of 12% and sells for $920. 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.
A 12-year bond of a firm in severe financial distress has a coupon rate of 12% and sells for $920. 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.
Explanation / Answer
Answer:
Calculation of Yield to maturity:
YTM = [C + {(F-P)/n}] / [(F+P)/n]
F = Face value =$1000
P =Price of the bond = $920
C= Coupon amount = 1000 * 12% = $120
n=Number of years = 12
Hence YTM = [120 + {(1000-920)/12}] / [(1000+920)/22]
= [120 + 6.67] / 960
= 0.1319
= 13.19%