Firm A is in severe financial distress. The 10-year bond with par value of 1000 and a coupon rate of 14% sells for $800. What is the YTM? The firm is currently renegotiating the debt, and it appears that the lenders will allow the firm to reduce coupon payments on the bond to half of the originally contracted amount. What is the latest revalued bond price?

True or False (You can make assumptions to support your justification)

• In a fairly priced market, given a flat yield curve, all government bonds must share the same yield to maturity.

• The holding period of return of a government bond within one year must be at the level of one-year spot rate r_1.

Discussion

• Explain why the yield curve has upward sloping under different theories.