Assume that the bonds of highly leveraged ByHy corporation currently have a yiel

Question

Assume that the bonds of highly leveraged ByHy corporation currently have a yield to maturity of 8% and are due to mature in 1 year. Meanwhile, assume that 1 year Treasury securities are yielding 1%. Also assume that investors expect that there is a 4% probability that ByHy corporation will default within the next year and that if it defaults they will only be able to recover 30% of the maturity value of the corporation's bonds.

a) Suppose that several prominent highly leveraged corporations (other than ByHy) default on their bonds. What would you expect to happen to the price of ByHy bonds and why? You need not give a numeric answer to this part of the question

Explanation / Answer

Alternatively, the demand of such bond will decrease which will again lead to the fall in the price of such bond

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