You bought a bond of GM on December 1, 2005. The Yield to Maturity at the time o

Question

You bought a bond of GM on December 1, 2005. The Yield to Maturity at the time of purchase was 7.4%. The bond had following characteristics: Term = 20 years, Coupon = 6% semi-annual, Face Value = $1,000.

On June 1, 2009 GM declared bankruptcy, and as part of the bankruptcy deal (worked with the help of US Government) the bond was renegotiated as follows.

Beginning June 1, 2009 no interest will be paid for next 6 years.

Afterwards, interest will be paid at 30% of the original coupon interest for the reminder of the term.

Determine the following.

On the day of bankruptcy declaration, the yield on the bond jumps by 4%, reflective of the added risk and Government intervention; if the Government had not intervened, the bond would be totally worthless). What was the bond trading on 6/1/2009?

Explanation / Answer

New Yield = 11.4%/2 = 5.7% on a semi annual basis

After bankruptcy

First Payment = Dec 2015

Last Payment = Dec, 2025

N = 21 (semi annual periods)

Coupon = 30% of 60/2 = 9

FV = 1000

PV = 427

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