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What is the new price of the bond? Suppose a firm issued a 20 year bond with coupon rate 9%. The bond has five years
What is the new price of the bond?
Suppose a firm issued a 20 year bond with coupon rate 9%. The bond has five years left until its maturity date. The coupons are paid out semi-annually. Assume the initial yield to maturity was 11%. The par value of the bond is $1,000. The bond has recently been selling at $750. New information is released that the issuer is having financial difficulties. Investors believe that the firm will be able to make good on interest payments, but at the maturity date, the firm will be forced into bankruptcy and the bondholders will receive only 55% of par value at maturity. Because of the higher risk, the investors now demand an expected yield to maturity of 12% annually. A. (5 points) what is the new price of the bond? B. (5 points) Suppose contrary to current expectations, the issuer is able to meet their full obligations. If you bought the bond immediately after the new information was released, what is the stated yield to maturity on promised cash flows? This is the return that junk bond investors are chasing after
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