A. Several years ago, Castles in Sand Inc. issued bonds at face value of $1,000 at a yield to maturity of 7.6%. Now, with 8 years left until the maturity of bonds, the company has run into hard time and the yield to maturity on the bonds has increased to 15%. What is the price of the bond now? (Assume semiannual coupon payments).
B. Supposed that investors believe that Castles can make good on the promised coupon payments but that the company will go bankrupt when the bond matures and the principal comes due. The expectation is that investors will receive only 85% of face value at maturity. If they buy the bond today, what yield to maturity do they expect to receive?