Need help with bonds

Yield becomes less relevant as a bond becomes distressed. Yield assumes that, for a bond trading at a discount, you will clip the coupon as well as book the appreciation in the notes as the bonds accrete towards par at maturity. Given that there is a real possibility of bankruptcy in distressed credits, the aforementioned becomes less relevant. As such, the dollar price of bonds becomes more relevant as it represents a claim on the collateral. Generally, yields of 15%+ indicate distress. Dollar prices of sub-70s are indicative of distress.

YTW, generally the safest to get a sense of return. There are cases when YTC or YTP are relevant depending on the situation. Again, in the distressed space, dollar price is more relevant.

For a distressed credit its more about price and very distressed/defaulting more of how much will you get back on your investment with which what price it trades at. Everyone else has hit on the YTW

Just a sense from the situations I have witnessed. Sub-70s tends to equate to a yield of 15% or above, generally speaking. In the current rate environment where spreads are tight and the number of bankruptcies are at all time lows, 15%+ is a tough rate of return to book without substantial risk to principal.

For question 1), you need to think about YTM as comprising two parts: a) the current yield; and b) the annual principal accrual. So if you have a 5-year, 5% coupon bond yielding 20%, the price is probably around $50. Essentially you are picking up 10% current yield and then another 10% in accrual ($50/5 years=10% per year). I don't know of a more precise way of doing it in your head but you should be able to ballpark it that way.

I agree that prices 80 range are indicative of at least the beginnings of distress, but as thebrofessor said, you really need to look at the rate environment as well. For example, if a AA-rated company issues a 30-year bond today, investors may require a 150bps spread over 30-year Treasuries to compensate them for the risk, which would equate to a ~4.5% coupon/yield. But in 5 years, if underlying rates were to rise dramatically, say to 7%, that bond's 4.5% coupon won't look so good. To maintain the same ~150bps spread over US Treasuries, the bond would have to yield 8.5%, which would result in a price of ~$60, even if the credit quality is unchanged. So you really need to look holistically at what is driving the price down.

So I think alain.harvey's reasoning is pretty sound when you've determined the bond price is due to a deterioration of the company's fundamentals. Think of it this way: When a company becomes distressed and is in danger of restructuring, the likely outcome of a restructuring is that the bondholders would become the new equity holders. So as a distressed bondholder, you really need to be compensated for equity-like risk, not debt-like risk. So you're talking 12-15% yields at a minimum these days.

The correct answer to the price question is that there is no definitive answer.

The key to answering is the theory. A credit security is distressed when the securities below it are a 0. When distressed, bonds tend not to trade on a yield basis anymore - instead they trade like equities.

Stressed bonds can be analyzed using YTM (not YTW, because the prepayment option favors the issuer, and the issuer cant afford to pay the call premium). Use YTM because you expect them to stay current on interest payments.

Distressed bonds are analyzed based on what you think recoveries will be. Make up any valuation methodology - but dont use yields.