Question

A 15-year bond of a firm in severe financial distress has a coupon rate of 12% and sells for $935. 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 one-half the originally contracted amount. The firm can handle these lower payments. What is (a) the stated and (b) the expected yield to maturity of the bonds? The bond makes its coupon payments annually.

Stated yield to maturity=?

Expected yield to maturity=?

Answer 1

Given

Price = $935

Coupon = 12% = 120

Face value = 1000

Time to maturity =15

Now, using the formula given below we can find the stated yield to maturity

To find the YTM we need to use goal seek option of Excel

In the image above we can see that price of the bond is 2800. That is because of the value of YTM field is empty (the yellow cell).

Now we use goal seek and find the value of YTM for which the price of the bond becomes 935

The input of goal seek is as follows

The answer is as follows

Hence, stated YTM = 13.01%

Now,

similarly, we can calculate the expected YTM by changing coupon from 120 to 60

The answer is as follows

Hence,

The expected YTM = 6.7%