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A 10-year bond of a firm in severe financial distress has a coupon rate of 14% and sells for $900. 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 are the stated and expected yields to maturity of the bonds

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Answer:

13.91% and 7.45%

Explanation:

In this question, we use the RATE formula that is shown below:

In the first case,

Given that,  

Present value = $900

Assuming figure - Future value or Face value = $1,000  

PMT = 1,000 × 12% = $120

NPER = 10 years

The formula is shown below:  

= Rate(NPER;PMT;-PV;FV;type)  

The present value come in negative  

So, after solving this, the yield to maturity is 13.91%

In the second case,

Given that,  

Present value = $900

Assuming figure - Future value or Face value = $1,000  

PMT = 1,000 × 12% ÷ 2 = $60

NPER = 10 years

The formula is shown below:  

= Rate(NPER;PMT;-PV;FV;type)  

The present value come in negative  

So, after solving this, the yield to maturity is 7.45%

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