a. Several years ago, Castles in the Sand Inc. issued bonds at face value of $1,000 at a yield to maturity of 5.2%. Now, with 5 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 11%. What is the price of the bond now? (Assume semiannual coupon payments.) (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Suppose that investors believe that Castles can make good on the promised coupon payments but that the company will go bankrupt when the bond matures and the principal comes due. The expectation is that investors will receive only 80% of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
a. Several years ago, Castles in the Sand Inc. issued bonds at face value of $1,000 at a yield to maturity of 5.2%. Now, with 5 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 11%. What is the price of the bond now? (Assume semiannual coupon payments.) (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. Suppose that investors believe that Castles can make good on the promised coupon payments but that the company will go bankrupt when the bond matures and the principal comes due. The expectation is that investors will receive only 80% of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
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