IP-3 - PROBLEM 4-2 Given Maturity Terms Face value Coupon...

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PROBLEM 4-2 Given Maturity 5 years Terms Interest only Face value $1,000 Coupon rate 12.00% Offering price $800 Solution a. Promised YTM = 18.46% Bond Rating Caa/CCC 10 Year Treasury Yield = 5.02% Coupon 12.00% Principal $1,000.00 Price $800.00 Maturity 5 years Recovery Rate 50.00% Default Probability 5.00% Default Cash Flows Year 1 2 3 0 $(800) $(800) $(800) 1 560 120 120 2 560 120 3 560 4 5 Expected yield to maturity if default occurs in this year -30.00% -8.50% 0.00% Probability of default in each year 5.00% 5.00% 5.00% Weighted YTM = E(YTM) x Pb of default -1.50% -0.42% 0.00% Average YTM based on Expected Cash Flows 12.51% YTM Spread 13.44% Cost of Debt Spread 7.49% b. (Note: the discussion of this analysis is found in the Appendix to the chapter)
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Solu = Value giv = Formula/ = Qualitati = Goal See = Crystal B = Crystal B s 4 5 $(800) $(800) $(800) 120 120 120 120 120 120 120 120 120 560 120 120 560 1,120 18.46% Promised YTM 4.48% 7.21% 18.46% 5.00% 5.00% 75.00% 0.22% 0.36% 13.85% Promised Cash Flow Expected YTM = Cost of debt
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This note was uploaded on 03/11/2011 for the course FIN 620 taught by Professor Shin during the Spring '09 term at University of Maryland Baltimore.

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IP-3 - PROBLEM 4-2 Given Maturity Terms Face value Coupon...

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