I have the following task, and I don't really know where to start nor which formula to even use. Thank you so much already ahead of time for any insight 🤗
You have a coupon bond from a European country with a face value of 1 million euros. This bond pays coupon interest of 4% once a year. There are 8 years left until the bond is extinguished, and the next coupon payment should take place tomorrow. Investors expect a return of 6% per year from this bond. It was like that this morning. During the day, however, it became clear that the country has run into financial difficulties and is therefore unable to pay out the coupon interest scheduled for the next day and for the next three years. However, as a result of the joint, quick efforts of the creditors, an agreement is immediately reached that the bonds will be restructured. According to the agreement, the debtor promises to transfer tomorrow's and three years' worth of coupon payments to the investors when the bond is canceled (i.e. after 8 years). However, the rest of the payments will be made according to the initial agreement.
a. Find how much you, as an investor, suffered a loss during the day if, considering the increased risk level, investors' expected income from bonds has momentarily increased to 12% per year.
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