Use this information to answer the next 3 questions. ACC, Inc. has $10 million f

Question

Use this information to answer the next 3 questions. ACC, Inc. has $10 million face value of zero coupon debt outstanding that is due in 5 years. You have been asked to analyze how viewing the equity in the firm as an option on the total value of the firm will impact how the firm is run. After careful research, you determine that the total value of the firm is $15 million and the value of the option to pay back the debt and avoid default when it comes due in 5 years is worth $8 million.  

14. Suppose the debt is worth $6 million. What is the debt's yield to maturity?

a.   8.08%

b.   8.89%

c.   9.78%

d.   10.76%

e.   11.83% The answer is d. 10.76% How do I do this?

Explanation / Answer

YTM of a zero coupon bond=(Face Value/Price)^(1/years to maturity)-1=(10/6)^(1/5)-1=10.76%

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