The yield to maturity for 10-year bonds is as follows for four different bond ra
ID: 1171131 • Letter: T
Question
The yield to maturity for 10-year bonds is as follows for four different bond rating categories. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
The bonds of Falter Corporation were rated as Aa1 and issued at par a few weeks ago. The bonds have just received a new rating of Aa3. Determine the new price of the bonds, assuming a 10-year maturity and semiannual interest payments. (Do not round intermediate calculations and round your answer to 2 decimal places.)
Price of the bonds
The yield to maturity for 10-year bonds is as follows for four different bond rating categories. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Explanation / Answer
New Price of Bond = Present Value of future cash flows
Bond rating =Aa1
Interest rate =8.6%=0.086
Assume,Face Value=$1,000
Semi annual interest payment= (0.086*1000)/2=$43
Number of semi annual period till maturity=10*2=20
interest rate of Aa3 Bond=10%
Semi annual interest rate=5%
Discount rate=5%
Present Value of Annuity of 1$ (20 periods, 5%) as per appendix D=12.462
Present Value of semi annual interest payments=43*12.462= $ 535.87
Present value of Maturity Payment of $1000:
Appendix B:
Present Value of $1 (20 periods, 5%)=0.377
Present value of maturity payments=1000*0.377=$377
New Price of Bond=$535.87+$377= $ 912.87
New Price of the Bonds
$ 912.87
New Price of the Bonds
$ 912.87
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