A $1,100 face value corporate bond with a 6.6 percent coupon (paid semiannually)
ID: 2699265 • Letter: A
Question
A $1,100 face value corporate bond with a 6.6 percent coupon (paid semiannually) has 11 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.3 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 8.6 percent. What will be the change in the bond%u2019s price in dollars and percentage terms?
A $1,100 face value corporate bond with a 6.6 percent coupon (paid semiannually) has 11 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.3 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 8.6 percent. What will be the change in the bond%u2019s price in dollars and percentage terms?
Explanation / Answer
bond price = 36.3 * PVIFA(3.65%,22) + 1100 * PVIF(3.65%,22)
= 36.3 * 14.9469 + 1100 * 0.4544 = 1042.41
after changing the return bond price
bond price = 36.3 * PVIFA(4.3%,22) + 1100 * PVIF(4.3%,22)
= 36.3 * 14.0455 + 1100 * 0.3960= 945.45
change in price = 1042.41 - 945.45 = 96.96
percentage terms = 96.96/1042.41 = 9.3%
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