Prob. 1. Default RiskA firm issued an 8% coupon bond (semiannual coupon payment) 20 years ago. Thebond now has 10 years left until its maturity date, but the firm is having financialdifficulty. Investors believe that the firm will be able to make interest ratepayments only for the first eight years. Starting in year nine, the firm will not beable to pay any coupon. In total, the firm will miss four coupon payments. Also,investors believe that the firm will be forced into bankruptcy eventually andbondholders will receive only 75% of par value.a) If the required interest rate is 11%, what is the present value of the couponpayments that the firm is able to pay? What is the present value of the parthat the firm is able to pay?b) What should the bond be selling at?c) What is the stated yield-to-maturity (YTM) of the bond?

Bond valuation entails determining the present value of a bond's future cash flows, which include…

a) If the required interest rate is 11%, what is the present value of the coupon payments that the firm is able to pay? What is the present value of the par that the firm is able to pay? b) What should the bond be selling at? c) What is the stated yield-to-maturity (YTM) of the bond?

a) If the required interest rate is 11%, what is the present value of the coupon payments that the firm is able to pay? What is the present value of the par that the firm is able to pay? b) What should the bond be selling at? c) What is the stated yield-to-maturity (YTM) of the bond?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter16: Capital Structure Decisions

Section: Chapter Questions

Problem 10MC: Suppose there is a large probability that L will default on its debt. For the purpose of this...

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

Prob. 1. Default Risk
A firm issued an 8% coupon bond (semiannual coupon payment) 20 years ago. The
bond now has 10 years left until its maturity date, but the firm is having financial
difficulty. Investors believe that the firm will be able to make interest rate
payments only for the first eight years. Starting in year nine, the firm will not be
able to pay any coupon. In total, the firm will miss four coupon payments. Also,
investors believe that the firm will be forced into bankruptcy eventually and
bondholders will receive only 75% of par value.
a) If the required interest rate is 11%, what is the present value of the coupon
payments that the firm is able to pay? What is the present value of the par
that the firm is able to pay?
b) What should the bond be selling at?
c) What is the stated yield-to-maturity (YTM) of the bond?

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