A $1,300 face value corporate bond with a 6.8 percent coupon (paid semiannually)

Question

A $1,300 face value corporate bond with a 6.8 percent coupon (paid semiannually) has 15 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.5 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 8.8 percent. What will be the change in the bond’s price in dollars and percentage terms? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 3 decimal places. (e.g., 32.161))

Explanation / Answer

Calculate price of the bond in an excel using the formula as shown below.

At YTM of 7.5% =PRICE(A1,A2,6.8%,7.5%,100,2) = 93.760

At YTM of 8.8% =PRICE(A1,A2,6.8%,8.8%,100,2) = 83.518

Here Coupon rate is 6.5%, redemption value of $100 for a FV of 100.

So price at 7.5% YTM is 93.760 * 1300 = 1,218.880

and price at 8.8% YTM is 83.518 * 1300 = 1,085.734

Change in bonds price in $ = 1,085.734 - 1,218.880 = -133.146

in % = 12.263% decrease

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.