2 years go by. MCO’s Treasurer was last seen with 2 suitcases of cash and a plane ticket for the Cayman Islands. The company is in serious financial trouble. Moody’s drops the rating from AA to B (Junk). The insurance company sells the bond to a hedge fund with 5 years left to maturity for a YTM of 14%. Summary: the bond has 5 years to maturity, a coupon of $50, a par value of $1000 and is trading with at YTM of 14%. A) What price did the insurance company receive for the bond? B) The hedge fund analyst believes that the bond will pay its remaining 5 coupon payments, but thinks the company will then go bankrupt and that it will pay just $500 of returned principal at maturity (not the full $1,000 par). Given what the fund paid for the bond, what YTM/overall return is the hedge fund really expecting to receive?
2 years go by. MCO’s Treasurer was last seen with 2 suitcases of cash and a plane ticket for the Cayman Islands. The company is in serious financial trouble. Moody’s drops the rating from AA to B (Junk). The insurance company sells the bond to a hedge fund with 5 years left to maturity for a YTM of 14%. Summary: the bond has 5 years to maturity, a coupon of $50, a par value of $1000 and is trading with at YTM of 14%. A) What price did the insurance company receive for the bond? B) The hedge fund analyst believes that the bond will pay its remaining 5 coupon payments, but thinks the company will then go bankrupt and that it will pay just $500 of returned principal at maturity (not the full $1,000 par). Given what the fund paid for the bond, what YTM/overall return is the hedge fund really expecting to receive?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Financial Disaster!
2 years go by.
MCO’s Treasurer was last seen with 2 suitcases of cash and a plane ticket for the Cayman Islands. The company is in serious financial trouble. Moody’s drops the rating from AA to B (Junk). The insurance company sells the bond to a hedge fund with 5 years left to maturity for a YTM of 14%.
Summary: the bond has 5 years to maturity, a coupon of $50, a par value of $1000 and is trading with at YTM of 14%.
- A) What price did the insurance company receive for the bond?
- B) The hedge fund analyst believes that the bond will pay its remaining 5 coupon payments, but thinks the company will then go bankrupt and that it will pay just $500 of returned principal at maturity (not the full $1,000 par). Given what the fund paid for the bond, what YTM/overall return is the hedge fund really expecting to receive?
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