(Default risk) You buy a very risky bond that promises a 9.5% coupon and return of the $1,000 principal in 10 years. You pay only $500 for the bond.

a. You receive the coupon payments for three years and the bond defaults. After liquidating the firm, the bondholders receive a distribution of $150 per bond at the end of 3.5 years. What is the realized return on your investment?

If you were trying to "cut and paste" it usually won't work here. You will need to type out all the possibilities.

Sra

The payments are $95 in year 1, 2 and 3 and $150 in year 3.5.

The purchase price is $500.
500 = 95/(1+rate) + 95/(1+rate)^2 + 95/(1+rate)^3 + 150/(1+rate)^3.5
Solving for rate, the rate comes to -4.98%.

To calculate the realized return on your investment, we need to take into account the initial investment, the coupon payments received, and the distribution received at the end.

1. First, let's calculate the total coupon payments received over the three years:
Coupon payment = Coupon rate * Principal
Coupon payment = 9.5% * $1,000 = $95 per year
Total coupon payments = $95 * 3 years = $285

2. Next, let's calculate the distribution received at the end:
Distribution per bond = $150

3. Now, let's calculate the total cash flows received:
Total cash flows = Coupon payments + Distribution
Total cash flows = $285 + $150 = $435

4. To find the realized return on your investment, we need to consider the initial investment and the total cash flows received:
Realized return = (Total cash flows / Initial investment) - 1
Realized return = ($435 / $500) - 1 = 0.87 - 1 = -0.13 or -13%

Therefore, the realized return on your investment is -13%. This indicates a negative return, which means you have experienced a loss on this investment.