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FINE 2000 Chapter Notes - Chapter 6: Premium Bond, Real Interest Rate, Current Yield

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silvercrow205
23 Apr 2016
School
York University
Department
Finance
Course
FINE 2000
Professor
Anthony Mayadunne

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Document Summary

Bond: security that obligates the issuer to make specified payments to the bondholder. Coupon: the interest payment paid to the bondholder. Coupon rate: annual interest payment as a percentage of face value. Face value: payment at the maturity of the bond. Asked price: what investors need to pay to buy the bond. Bid price: an investor who already owns a bond and wishes to sell it would receive the bid price. Just as the used-car dealer earns a living by reselling cars at higher prices than he paid for them, so the bond dealer needs to charge a spread between the bid and the asked price. Bid yield and ask yield, stand for bid yield to maturity and ask yield to maturity. The ask yield measures the rate of return that investors will receive ift hey buy the bond at the asked price and hold it to maturity.

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Related Questions

Q.2     a.) Baby doll Inc., issued bonds at face value at a yield to maturity of 8 percent. Now, with 8 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 14 percent. What has happened to the price of the bond?

Face Value $1000

b.) Suppose that investors believe that Baby doll can make good on the promised coupon payments, but that the company will go bankrupt when the bond matures and the principal comes due. The expectation is that investors will receive only 80 percent of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive?

a.

Several years ago, Castles in the Sand, Inc., issued bonds at face value at a yield to maturity of 5.2%. Now, with 5 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 11%. What is the price of the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Price of the bond $
b.

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. The expectation is that investors will receive only 80% of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Yield to maturity %

A. Several years ago, Castles in the Sand, Inc., issued bonds at face value at a yield to maturity of 5.8%. Now, with 5 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 15%. What is the price of the bond? (in dollars)

B. 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. The expectation is that investors will receive only 85% of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive? (in percentage %)