Question

using a finance calculator if possble. no excel

5. Several years ago, Astra-Zeneca issued new bonds at face value witha yield- to-maturity of 7%. Now, with 8 years left until the maturity of the bonds, the company has run into some hard times and the rating on their bonds has had a negative impact on their bond prices. The yield-to-maturity is now at 15%. What has happened to the price of the bond? If investors believe that the company will make good on their coupon payments but MIGHT go bankrupt before the full value on their principal is returned, they now think that, at the most, they might get back only 75% of the face value at maturity. Knowing all this, if they were to buy this bond TODAY, what yield-to-maturity would they expect to receive?

Answer 1

1: Using financial calculator

Input: FV= 1000

I/Y = 15

N = 8

PMT = 7%*1000 = 70

(Since the bonds were issued at par, coupon rate = YTM)

Solve for PV as -641.01

Price of the bond = $641.01

The price of the bond has declined with an increase in YTM.

2: Using financial calculator

Input

FV = 75%*1000 = 750

N = 8

PMT = 70

PV = -641.01

Solve for I/Y as 12.29

Hence the YTM = 12.29%