What is the current price of this bond

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Reference no: EM132767056

Question - In 2018, Dick Smith Holdings LLC issued a 8.00% coupon bond due in October 2023 (assume semi-annual payments and interest rates are semi-annually compounded). Now it is October 2020, and things are not looking good for the retailer. Formally, your Bloomberg screen is quoting a YTM of 20.00%. Assume a face value of $1,000 throughout.

Required -

A) What is the current price of this bond?

This high yield, however, is not guaranteed due to the binary outcomes that are possible for this bond. Investors are pricing in bankruptcy with some probability p. In 4 months from today, a large credit facility (bank loan) is due and the company will likely be unable to pay it back or refinance it. In this case, bondholders will be paid a fixed recovery value of 33.0% of the principal after the bankruptcy process is completed one year from today. If, however, the firm is somehow able to overcome this obstacle (with probability 1-p), bond A will make all scheduled payments and return the principle at maturity. In either scenario assume a risk-free semi-annual discount rate of 4.5% per year to discount both outcomes individually.

B) First, compute the value of the bond today under the assumption of no bankruptcy.

C) Given your answer in part A), what is the default probability implied by the market?

Reference no: EM132767056

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