What is the stated and expected yield to maturity of the bonds? The bond makes its coupon payments
QUESTION
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 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 is the stated and expected yield to maturity of the bonds? The bond makes its coupon payments annually.
Original Coupon Paymemt = 140 Present Value = $900 Number of periods =10 Stated Yield To maturity : 900 = 140/(1+r)^1 + 140/(1+r)^2 + ..140/(1+r)^10 YTM (r)= 16.07% annually. On the renogotiated
ebt, Coupon payment is halved Coupon = $70 annually Expected YTM: 900 = 70/(1+r)^1 + 70/(1+r)^2 + 70/(1+r)^10 YTM (r) = 8.53%.
ANSWER:
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