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(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?
2 answers
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%.
0 answers