A bond%u2019s credit rating provides a guide to its risk. Long-term bonds rated

Question

A bond%u2019s credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer yields to maturity of 5.7%. A-rated bonds sell at yields of 6%. Assume a 10-year bond with a coupon rate of 5.2% is downgraded by Moody%u2019s from Aa to A rating.

Calculate the initial price. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Calculate the new price. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Calculate the initial price. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

follow this

An increase in YTM will decrease the Market Value of the Bond

Let's say the Bond had a par Value of $1000, coupon rate is 6.9% with 20 years to maturity

If this was Rated Aa bond it has the market value of $938.83
If its was dropped to a A - Ratings bond will be worth $910.31

Here is how the drop down of the values

Aa Rated Bond's Market Value of $938.83 = $703.42 in interest and $235.41 in Maturity Value's Present Value

A Rated Bond's Market Value of $910.31 = $687.65 in interest and $222.65 in Maturity Value's Present Value

You can use MS Excel to find the Market Value of the Bonds

Aa Rated Bond's Market Price
=PV(0.075,20,69,1000)
-938.83

A Rated Bond's Market Price
=PV(0.078,20,69,1000)
-910.31

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