You have purchased a risky bond for 775 you knew it was, Ask an Expert

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You have purchased a risky bond for $775. You knew it was junk because it was rated B by ABCD Ratings Agency. Unfortunately, minutes after you made the purchase, ABCD Ratings Agency downgrades the bond from B to C and explains that it now estimates the company faces a 50% chance of going bankrupt before the end of the year. Now the bond is considered riskier and the potential buyers require a higher default risk premium of, say, 10%. What is the price of the bond? If you sold it, what would be your % capital loss? Assume that a one year bond P=775 with F=1000, coupon rate=0.1, and YTM on risk free bond is 0.1. what the expected return on the bond is after the increase in the risk of default and as a result the new price of bond?

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Financial Management, Finance

Category:- Financial Management
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