In the spring of 1992 it became apparent that Olympia & York (O&Y) would have serious difficulty in servicing its debt. Because of this risk, investors were heavily discounting O&Y’s bond issues. On April 30, 1992 an Olympia & York bond issue, paying an 11.25% coupon rate and maturing on October 31, 1998, traded at $761.50 (per 1000 of face value). (This was at a time when Government of Canada bonds with a similar coupon and maturity date were trading at a premium of about 10% above par.) If O&Y had managed to make the contractual payments on these bonds, what yield to maturity would investors who purchased those bonds on April 30, 1992 have realized? (P.S. They didn’t!)
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