The yield-to-maturity is now at 7%. What has happened to the price of the bond? If investors believe that the company will make good on their coupon payments but MIGHT go bankrupt before the full value on their principal is returned, they now think that, at the most, they might get back only 90% of the face value at maturity. Knowing all this, if they were to buy this bond TODAY, what yield-to-maturity would they expect to receive assuming interest rates remain the same until maturity?
The yield-to-maturity is now at 7%. What has happened to the price of the bond? If investors believe that the company will make good on their coupon payments but MIGHT go bankrupt before the full value on their principal is returned, they now think that, at the most, they might get back only 90% of the face value at maturity. Knowing all this, if they were to buy this bond TODAY, what yield-to-maturity would they expect to receive assuming interest rates remain the same until maturity?
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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Several years ago, AMD issued new bonds at face value with a yield-to-maturity of 6%. Now, with 5 years left until the maturity of the bonds, the company has run into some hard times and the rating on their bonds has had a negative impact on their bond prices. The yield-to-maturity is now at 7%. What has happened to the price of the bond? If investors believe that the company will make good on their coupon payments but MIGHT go bankrupt before the full value on their principal is returned, they now think that, at the most, they might get back only 90% of the face value at maturity. Knowing all this, if they were to buy this bond TODAY, what yield-to-maturity would they expect to receive assuming interest rates remain the same until maturity?
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