A bond’s credit rating provides a guide to its risk. Long-term bonds rated Aa cu

Question

A bond’s credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer yields to maturity of 5.1%. A-rated bonds sell at yields of 5.4%. Assume a 10-year bond with a coupon rate of 4.6% is downgraded by Moody’s from Aa to A rating.

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

Initial price $

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

New price $

Explanation / Answer

a)initial price can be found using pv formuale in excel

=pv(rate,nper,pmt,fv,type)

rate=5.1% nper=10 pmt=coupon= 4.6%*1000=$46 fv=1000

=$961.58

b)final price

=pv(rate,nper,pmt,fv,type)

rate=5.4% nper=10 pmt=coupon= 4.6%*1000=$46 fv=1000

=$939.41

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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