Question: You are analyzing a distressed bond with one year to maturity. The bond has a face value of $100 and pays a coupon rate of

You are analyzing a distressed bond with one year to maturity. The bond has a face value of $100 and pays a coupon rate of 5 percent per year. The bond is currently trading at $80. What is the yield to maturity on the bond? If the probability of default is 35 percent, what is the cost of debt? Assume that upon default only 50 percent of face value will be recovered and that remaining coupons will not be paid.

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