Question

You buy a very risky bond that promises an 8.8% coupon and return of the
$1,000 principal in 10 years. You pay only $500 for the bond.

You receive the coupon payments for two years and the bond defaults. After liquidating
the firm, the bondholders receive a distribution of $150 per bond at the end of 2.5
years. What is the realized return on your investment?

Answer 1

Use the IRR excel function to estimate the seminannual IRR. Your cash flows are:
0: -500
1: 44 (I am assuming semiannual coupon payments: this is = 1000 x 8.8% / 2)
2: 44
3: 44
4: 44
5: 150

The answer is -10.72% realized semiannual return; Now to annualize it use [(1+Semi IRR)^2 - 1]. I get -20.29% realized annual IRR.

Answer 2

thanks