Environ Systems is a firm that specializes in cleaning environmental damage (waste disposal) and chemicals. As part of its expansionary plans, it has made a large issuance of 10-year corporate bonds, with a face value of $1000 each and an annual coupon rate of 11%.

(a) Assuming a discount rate (normal compounding) of 7%, calculate the value of the bond.

(b) Environ got into deep financial troubles after one year and realised in the second year it will default on (i.e.: it will stop paying some cashflows). During that year (second), Environ negotiated with bondholders on two different debt restructuring deals which included:

i) extending the maturity of the bond 2 extra years (i.e.: from 10 years previously to 12 years Hint: face value is paid in year 12. No coupon is paid in year 11 or 12). Calculate the new bond price.

ii) a full relief from coupon payments in years 7, 8, 9 and 10. Face value is fully paid on year 10. Calculate the new bond price.

iii) Show which deal is better for Environ (considering the net present value (NPV) of the cashflows).