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 are the stated and expected yields to maturity of the bonds

Answer 1

13.91% and 7.45%

Step-by-step explanation:

In this question, we use the RATE formula that is shown below:

In the first case,

Given that,

Present value = $900

Assuming figure - Future value or Face value = $1,000

PMT = 1,000 × 12% = $120

NPER = 10 years

The formula is shown below:

= Rate(NPER;PMT;-PV;FV;type)

The present value come in negative

So, after solving this, the yield to maturity is 13.91%

In the second case,

Given that,

Present value = $900

Assuming figure - Future value or Face value = $1,000

PMT = 1,000 × 12% ÷ 2 = $60

NPER = 10 years

The formula is shown below:

= Rate(NPER;PMT;-PV;FV;type)

The present value come in negative

So, after solving this, the yield to maturity is 7.45%