Bankruptcy can both lower the payout on a bond and delay payment. We have so far focused on the first issue. This problem examines the second.

Suppose Patti buys a discount bond for $9,265.00 that has a face value of $10,000 and is one year from maturity. Shortly after buying the bond, Patti reads in the paper that the company has filed for Chapter 7 bankruptcy. Though Patti is eventually paid in full, she does not receive the payment until 2 years after maturity.

 

What was the promised YTM when Patti purchased the bond?

 

What (annual) return did Patti actually earn on the bond?

Answer rating: 100% (QA)

To solve this problem we need to use the formula for yield to maturity PV FV 1 YTMn Where PV is the ... View the full answer