(10 points) Five years ago, Highland, Inc. issued a corporate bond with an annua
ID: 2615160 • Letter: #
Question
(10 points) Five years ago, Highland, Inc. issued a corporate bond with an annual coupon of $6,000, paid at the rate of $3,000 every six months, and a maturity of 28 years. The par (face) value of the bond is $1,000,000. Recently, however, the company has run into some financial difficulty and has restructured its obligations. Today's coupon payment has already been paid, but the remaining coupon payments will be postponed until maturity. The postponed payments will accrue interest at an annual rate of 6.0% per year and will be paid as a lump sum amount at maturity along with the face value. The discount rate on the renegotiated bonds, now considered much riskier, has gone from 8.5% prior to the renegotiations to 14.5% per annum with the announcement of the restructuring. What is the price at which the new renegotiated bond should be selling today? Recall that the compounding interval is 6 months and the YTM, like all interest rates, is reported on an annualized basis.
Explanation / Answer
As the bond has been issued 5 year ago for 28 years , as of today time till maturity = 23 years
Coupon = $3000 / half yearly with accrue interest at an annual rate of 6.0% per year or 3% per half year
In restructing process , the YTM ( discount rate = 14.5%)
Today value of bond = Maturity value / ( 1+r) ^n = 1289504 / (1.145)^23 =57265.95 = $ 57266
Accured Interest rate 3% (half year) Series Coupon Fv(coupon) 0 1 3000 11344.78752 2 3000 11014.35682 3 3000 10693.55031 4 3000 10382.08768 5 3000 10079.69678 6 3000 9786.113376 7 3000 9501.080948 8 3000 9224.350435 9 3000 8955.680034 10 3000 8694.834984 11 3000 8441.587363 12 3000 8195.715887 13 3000 7957.005715 14 3000 7725.248267 15 3000 7500.241036 16 3000 7281.787414 17 3000 7069.696518 18 3000 6863.783027 19 3000 6663.867017 20 3000 6469.773803 21 3000 6281.333789 22 3000 6098.382319 23 3000 5920.759533 24 3000 5748.310227 25 3000 5580.883715 26 3000 5418.333704 27 3000 5260.518159 28 3000 5107.299184 29 3000 4958.542897 30 3000 4814.119317 31 3000 4673.90225 32 3000 4537.769175 33 3000 4405.60114 34 3000 4277.282661 35 3000 4152.701612 36 3000 4031.749138 37 3000 3914.319551 38 3000 3800.310244 39 3000 3689.621596 40 3000 3582.15689 41 3000 3477.822223 42 3000 3376.52643 43 3000 3278.181 44 3000 3182.7 45 3000 3090 46 3000 3000 Total 289504.4 Face Value 1000000 Total Maturity Value 1289504Related Questions
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