Risky Bond

# Risky Bond - Total received payments: \$435 For ROI: profit...

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B18. (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? The bond is valued at \$1,000, and has a .095 coupon rate. The bond should be redeemed in  10 years, and you paid only \$500 for it. Coupon payments: Year 1: 1,000 x .095 = 95 Year 2: 95 Year 3:95 Total coupon payments: 285 Bondholder distribution: 150

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Unformatted text preview: Total received payments: \$435 For ROI: profit x 100/ investment x years invested (435 - 500) x 100 / (500 x 3.5) = -6500/ 1750 = -3.71% realized return on investment b. The firm does far better than expected and bondholders receive all of the promised interest and principal payments. What is the realized return on your investment? If the firm did not default and payed out all interest and principle: Interest revenue: 1,000 x .095 x 11 = 1,045 Principle: 1,000 Total received: 2,045 Investment: 500 ROI: (2045 - 500) x 100 / (500 x 11) = 154,500 / 5,500 = 28.09% realized return on investment....
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## This note was uploaded on 03/23/2012 for the course ACCT 306 taught by Professor Mikewoodard during the Spring '12 term at DeVry Houston.

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Risky Bond - Total received payments: \$435 For ROI: profit...

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