The yield-to-maturity is now at 7%. What has happened to the price of the bond? If investors believe that the company will make good on their coupon payments but MIGHT go bankrupt before the full value on their principal is returned, they now think that, at the most, they might get back only 90% of the face value at maturity. Knowing all this, if they were to buy this bond TODAY, what yield-to-maturity would they expect to receive assuming interest rates remain the same until maturity?

The yield-to-maturity is now at 7%. What has happened to the price of the bond? If investors believe that the company will make good on their coupon payments but MIGHT go bankrupt before the full value on their principal is returned, they now think that, at the most, they might get back only 90% of the face value at maturity. Knowing all this, if they were to buy this bond TODAY, what yield-to-maturity would they expect to receive assuming interest rates remain the same until maturity?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 19P

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Many years ago, Castles in the Sand Incorporated issued bonds at face value at a yield to maturity of 8%. Now, with 7 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 12%. What is now the price of the bond? (Assume semiannual coupon payments.) 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 82% of face value at maturity. If they buy the bond today, what yield to maturity do they expectto receive?
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