Question

A 12-year bond of a firm in severe financial distress has a coupon rate of 12% and sells for $920. 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.

Answer 1

13.37% ; 7.01%

Step-by-step explanation:

The computation of the stated and expected yields to maturity of the bonds is shown in the attachment below:

For stated yield, we use the RATE formula i.e

Given that,

Present value = $920

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

PMT = 1,000 × 12% = $120

NPER = 12 years

The formula is shown below:

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

The present value come in negative

So, after solving this, the stated yield is 13.37%

Now for expected yield, we also use the RATE formula i.e

Given that,

Present value = $920

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

PMT = 1,000 × 12% ÷ 2 = $60

NPER = 12 years

The formula is shown below:

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

The present value come in negative

So, after solving this, the expected yield is 7.01%