Several years ago, Castles in the Sand, Inc., issued bonds at face value at a yi

Question

Several years ago, Castles in the Sand, Inc., issued bonds at face value at a yield to maturity of 5.2%. Now, with 5 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 11%. What is the price of the bond? (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.)

Several years ago, Castles in the Sand, Inc., issued bonds at face value at a yield to maturity of 5.2%. Now, with 5 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 11%. What is the price of the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

A)When the bond was issued, the Price = $1000 = FV
And the annual return rate is the coupon rate = 5.2%
Then yearly payment is 1000 * 5.2% = $52
with number of years left = 5
and new return rate= 11%
We can compute current price by:
PV=-731.83

B)The FV is 80% of the face value, or 1000*80% = $800
The rest terms remain the same as part A:
PV =-731.83 (negative sign means investment)
Annual payment = 52
number of years = 5
By a financial calculator, we can compute YTM by
(I/Y) Rate = 9.67%

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