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 8.2%. Now, with 7 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 15%. The price of the bond is $717.09

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 85% of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive? CALCULATE YIELD TO MATURITY.

The question bolded above is what needs to be answered. The information prior to that will help solve it.

Several years ago, Castles in the Sand, Inc., issued bonds at face value at a yield to maturity of 8.2%. Now, with 7 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 15%. The price of the bond is $717.09

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 85% of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive? CALCULATE YIELD TO MATURITY.

The question bolded above is what needs to be answered. The information prior to that will help solve it.

Explanation / Answer

1) The price of the bond would have decreased Since the bond was issued at par, coupon rate = YTM at the time of issue= 8.2% Price of bond Coupon rate= 8.200% Face value= 1000 Frequency= A Annual No of years to maturity= 7 No of Periods= 7 Discount rate annually= 15.00% annual Discount rate per period= 15.00% n= 7 periods r= 15.00% per period Coupon payment per period= 82 Annual Redemption value= 1000 PVIF (7 periods, 15.% rate)= 0.375937 PVIFA (7 periods, 15.% rate)= 4.16042 Price of bond=PVIFA X Interest Payment+PVIF X Redemption value PVIFA X Interest Payment= 341.15 =4.16042*82 PVIF X Redemption value= 375.94 =0.375937*1000 Total= 717.09 =Price of bond Answer: The price of the bond has decreased to $717 2) Coupon payment= $82 Face value = $1,000 Price= $717 Years to maturity= 7 Redemption of principal= 85% of face value= $850 Yield to maturity can be calculated using EXCEL function RATE Yield to maturity= 13.21% =RATE(7,82,-717,850)

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