Question

A 10-year bond of a firm in severe financial distress has a coupon rate of 12% 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 are the stated and expected yields to maturity of the bonds? The bond makes its coupon payments annually. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Stated yield to maturity %
Expected yield to maturity %

Answer 1

The Stated Yield to Maturity is 13.91%

The Expected Yield to Maturity is 7.45%

Step-by-step explanation:

We can calculate using a financial calculator or rate function in Microsoft Excel.

We are given

-Number of periods=10

-Present Value (PV)=900

-Coupon amount (PMT)= 120 (1000*12%)

-Future Value (FV)= 1000

we get 13.91% as Stated yield to maturity

For Expected Yield to maturity

We are given

-Number of periods=10

-Present Value (PV)=900

-Coupon amount (PMT)= 60 (120*50%)

-Future Value (FV)= 1000

we get 7.45% as expected Yield to Maturity