Question
(Default risk) You buy a very risky bond that promises a 9.5% coupon and return of the $1,000 principal in 10 years. You pay only $500 for the bond.
a. You receive the coupon payments for three years and the bond defaults. After liquidating the firm, the bondholders receive a distribution of $150 per bond at the end of 3.5 years. What is the realized return on your investment?
a. You receive the coupon payments for three years and the bond defaults. After liquidating the firm, the bondholders receive a distribution of $150 per bond at the end of 3.5 years. What is the realized return on your investment?
Answers
If you were trying to "cut and paste" it usually won't work here. You will need to type out all the possibilities.
Sra
Sra
The payments are $95 in year 1, 2 and 3 and $150 in year 3.5.
The purchase price is $500.
500 = 95/(1+rate) + 95/(1+rate)^2 + 95/(1+rate)^3 + 150/(1+rate)^3.5
Solving for rate, the rate comes to -4.98%.
The purchase price is $500.
500 = 95/(1+rate) + 95/(1+rate)^2 + 95/(1+rate)^3 + 150/(1+rate)^3.5
Solving for rate, the rate comes to -4.98%.