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. Example: . Suppose a firm issued a 9% coupon bond (semiannual coupon) 20 years ago. The bond n ow has 10 years left until
. Example: . Suppose a firm issued a 9% coupon bond (semiannual coupon) 20 years ago. The bond n ow has 10 years left until its maturity date. The bond is selling at $ 750. . But the firm is having financial difficulty. Investors believe that the firm will be able to ma ke good on the remaining interest rate payments but that at the maturity date, the firm w ill be forced into bankruptcy and bondholders will receive only 70% of par value. . Par value: stated ($1,000) vs. believed (70% $1,000) Calculate yields: Expected YTM Stated YTM Coupon payment $45 $45 Number of semiannual periods 20 periods 20 periods Final payment $700 $1,000 Price $750 $750 . Comparing yields: Expected YTM = ?, Stated YTM = ? FIA301, FALL 2019 Default Risk and Bond Pricing Example (cont'd.): . Suppose the condition of the firm deteriorates further, and investor now believe that the b ond will pay off only 55% of face value at maturity. Investors now demand an expected yi eld to maturity of 12% (i.e., 6% semiannually). What is the price of the bond? (n = 20; i = 6; FV = 550; PMT = $45] What is the stated YTM
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