A corporate bond with a 7.7 percent coupon has 16 years left to maturity. It has

Question

A corporate bond with a 7.7 percent coupon has 16 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 8.4 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 9.7 percent.

What will be the change in the bond

A corporate bond with a 7.7 percent coupon has 16 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 8.4 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 9.7 percent.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Current Price

Nper = 16*2 = 32 (indicates the period)

PV = ? (indicates the price)

FV = 1000 (indicates the face value)

Rate = 8.4%/2 = 4.20% (indicates semi-annual YTM)

PMT = 1000*7.70%*1/2 = 38.50 (indicates the amount of interest payment)

Old Price = PV(Rate,Nper,PMT,FV) = PV(4.20%,32,38.50,1000) = 939.01

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Revised Price:

Nper = 16*2 = 32 (indicates the period)

PV = ? (indicates the price)

FV = 1000 (indicates the face value)

Rate = 9.7%/2 = 4.85% (indicates semi-annual YTM)

PMT = 1000*7.70%*1/2 = 38.50(indicates the amount of interest payment)

Revised Price = PV(Rate,Nper,PMT,FV) = PV(4.85%,32,38.50,1000) = $839.11

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Change in Price = 839.11 - 939.01 = -99.89

Change in % = -99.89/939.01*100 = -10.64%

Thanks.

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