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 7.9%. A-rated bonds sell at yields of 8.2%. Assume a 10-year bond with a coupon rate of 7.4% is downgraded by Moody’s 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.)

A bond’s credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer yields to maturity of 7.9%. A-rated bonds sell at yields of 8.2%. Assume a 10-year bond with a coupon rate of 7.4% is downgraded by Moody’s from Aa to A rating.

Explanation / Answer

(a)

(B)

Periodic required return, r   7.9% Coupoun Rate (annually)          7.4% Coupoun or interest, C              74 Maturity Value, M (Assumed)                 1000 Number of years left to Maturity, n 10 Value of bond (P) is equal to the present value of the cash flows expected from it. P = C/(1+r) + C/(1+r)^2 +...+ C/(1+r)^n + M/(1+r)^n P = ?C/(1+r)^n + M/(1+r)^n P = C*PVIFA(r,n) + M*PVIF(r,n) PVIFA(r,n)    7.0236 PVIF(r,n)      0.5083 Initial Value of bond (Price) ,P   1028.05

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