Question
Wallo, Inc. is an import/export firm that is growing rapidly. The firm needs capital quickly to support this growth. Management is considering issuance of a
Wallo, Inc. is an import/export firm that is growing rapidly. The firm needs capital quickly to support this growth. Management is considering issuance of a 4 year interest-only note. The note would have a principal amount of $1,000 and pay 14% interest each year, with the principal amount due at the end of year 4. The notes are expected to have a market value today of $850 each.
1) Calculate the expected yield to maturity on the debt under the following assumptions - risk of default in years 1-4 is 7% per year, and the recovery rate in the event of default is only 60%.
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