This is the only question I need help with:
a. Several years ago, Castles in the Sand Inc. issued bonds at a face value at a yield to maturity of 7 percent. Now, with 8 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 15 percent. What has happened to the price of the bond?

b. Suppose that investors believe that Castles can make good on the promised coupon payments, but that the company will go bankrupt when the bond matures and the principal comes due. The expectation is that investors will receive only 80 percent of face value at maturity. If they buy the bond today, What yield to maturity do they expect to receive

This is the only question I need help with:
a. Several years ago, Castles in the Sand Inc., issued bonds at a face value at a yield to maturity of 7 percent. Now, with 8 years left until the maturity of the bonds, the company has run into hard times and the yield to maturity on the bonds has increased to 15 percent. What has happened to the price of the bond?

b. Suppose that investors believe that Castles can make good on the promised coupon payments, but that the company will go bankrupt when the bond matures and the principal comes due. The expectation is that investors will receive only 80 percent of face value at maturity. If they buy the bond today, What yield to maturity do they expect to receive


Kk

A. Several years ago, Castles in the Sand, Inc. issued bonds at face value at a yield to maturity of 7 percent. Now, with 8 years left until the maturity of the bonds the company has run into hard times and the yield to maturity on the bonds has increased to 15 percent. What has happened to the price of the bond?
In excel =PV(15%,8,70,1000)
When the bond was issued, the Price = $1000 = FV
And the annual return rate is the coupon rate = 7%
Then yearly payment is 1000 * 7% = $70
with number of years left = 8
and new return rate= 15%
We can compute current price by:
PV=641.01
From this there is an obvious drop in price
b. Suppose that investors believe that Castles can make good on the promised coupon payments, but that the company will go bankrupt when the bond matures and the principal comes due. The expectation is that investors will receive only 80 percent of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive?
The FV is 80% of the face value, or 1000*80% = $800
The rest terms remain the same as part A:
PV = -641.01 (negative sign means investment)
Annual payment = 70
number of years = 8
By a financial calculator, we can compute YTM by
(I/Y) Rate = 13%
(In EXCEL, use command: =RATE(8,70,-641.01,800)