FIN 3715 Chapter : Additional Bond Valuation Questions Answered
Document Summary
Additional bond valuation questions: bond prices and yields several years ago, castles in the sand, inc. , issued bonds at face value at a yield to maturity of 8%. Now with 8 years left until the maturity of the bonds, the company has run into hard times and yield to maturity on the bonds has increased to 14 percent. When know that when the ytm rise (that"s also the discount rate for the bond"s cash flows), the present value of the bond"s cash flows will decrease. For a semiannual bond: coupon payment is per period (since the bond was sold at face value at a ytm of 8%, i. e. its coupon rate must also be 8%) New price = pv(coupon @ 7% semiannually) + pv(face value @ 7% semiannually) Suppose that investors believe that castles can make good on the promised coupon payments, but that the company will go bankrupt when the bond matures and the principal comes due.
