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26 April, 22:18

A 20-year bond of a firm in severe financial distress has a coupon rate of 13% and sells for $905. The firm is currently negotiating the debt, and it appears that the lenders will allow the firm to reduce coupon payments on the bond to one-half the originally contracted amount. The firm can handle these lower payments. What is (a) the stated and (b) the expected yield to maturity of the bonds?

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  1. 26 April, 22:39
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    (a) The Stated yield to maturity is 14.474%

    (b) The Expected yield to maturity is 7.427%

    Explanation:

    (a) FV = Face value = - $1,000.00

    PV = Bond price = $905.00

    PMT = Coupon = - $130.00

    N = Years to mature x frequency = 20

    CPT > I/Y = Rate = 14.4737

    Yield to Maturity = Rate * Frequency / 100 = 14.474%

    Therefore, The Stated yield to maturity is 14.474%

    (b) Coupon payment will become half of the precious = 130/2 = $65

    FV = Face value = - $1,000.00

    PV = Bond price = $905.00

    PMT = Coupon = - $65.00

    N = Years to mature x frequency = 20

    CPT > I/Y = Rate = 7.4267

    Yield to Maturity = Rate * Frequency / 100 = 7.427%

    Therefore, The Expected yield to maturity is 7.427%.
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