Highly leveraged corporations

Assignment Help Finance Basics

Reference no: EM13745467

1. Assume that the bonds of highly leveraged ByHy corporation currently have a yield to maturity of 8% and are due to mature in 1 year. Meanwhile, assume that 1 year Treasury securities are yielding 1%. Also assume that investors expect that there is a 4% probability that ByHy corporation will default within the next year and that if it defaults they will only be able to recover 30% of the maturity value of the corporation's bonds.

a) Suppose that several prominent highly leveraged corporations (other than ByHy) default on their bonds. What would you expect to happen to the price of ByHy bonds and why?

b) Assume that after the news of defaults by other highly leveraged corporations, investors now expect an 8% probability of default and a recovery rate of only 20% in the event of default on ByHy's bonds. Also assume that increased uncertainty about the future of the high yield market has caused the required rate of return on ByHy's bonds to change to 10%. What will be the new yield to maturity on ByHy's bonds?

Reference no: EM13745467

Questions Cloud

How understanding of history deepens understanding of event : Choose a current world event (in other words, not an event that happened in the United States or primarily affects the United States) and explain how an understanding of history deepens an understanding of that event.

What is the connection between nutrition and health : What is the connection between nutrition and health and What is the relationship between poor nutrition and disease

Percentage return on the investment : If an investor purchases shares in a no load fund for $36, receives cash distributions of $1.27 and sells the shares after one year for $41.29, what is the percentage return on the investment?

What is the clear cut distinction between innovation : What is the clear cut distinction between innovation and entrepreneurship

Highly leveraged corporations : Assume that after the news of defaults by other highly leveraged corporations, investors now expect an 8% probability of default and a recovery rate of only 20% in the event of default on ByHy's bonds.

What is the hypothesis : A plant biologist notices that plants grown in fertilizer are larger than plants grown without fertilizer. What is the hypothesis

Compute the cost of debt before taxes and after taxes : A company issues 15-year, $1,000 par-value bonds,with a coupon rate of 5%. The bonds are sold for $619.70. The tax rate is 30%. Compute the cost of debt before taxes and after taxes.

Examine the labels for sugar content : Examine the labels for sugar content. Remember that there are many terms which can be used for sugar

Production planning strategies is best for mama''s stuffin : Mama's Stuffin' is a popular food item during the fall and winter months, but it is marginal in the spring and summer. Use the following demand forecasts and costs to determine which of the following production planning strategies is best for Mama..

User Account

All Pages