Suppose that investors believe that Castles can make good on the promised coupon

Question

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 80% of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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 80% of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

Suppose Per Value is $                         100.00 So at maturity it will give 80% $                           80.00 Let Coupon Rate is 7% So interest Earnings $                              7.00 So, annual rate is 7/80 8.75% Suppose matuirity is 8 years PV Factor Present year Income at 7% Value 1 7 0.934579 6.54206 2 7 0.873439 6.11407 3 7 0.816298 5.71409 4 7 0.762895 5.34027 5 7 0.712986 4.9909 6 7 0.666342 4.6644 7 7 0.62275 4.35925 8 87 0.582009 50.6348 Total 136 88.3598 Yield to Maturity 13.17% (100/88.3598)-1

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