A $3,000 face value corporate bond with a 6.9 percent coupon (paid semiannually)

Question

A $3,000 face value corporate bond with a 6.9 percent coupon (paid semiannually) has 15 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.4 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 8.9 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)) Change in the bond’s price in dollars $ Change in the bond’s price in percentage %

Explanation / Answer

corporate earlier price at BBB rating

=(3000*6.9%/2)*((1-(1+(7.4%/2))^(-15*2))/(7.4%/2))+3000/(1+(7.4%/2))^(15*2)

=2865.452

corporate new price at BB rating

=(3000*6.9%/2)*((1-(1+(8.9%/2))^(-15*2))/(8.9%/2))+3000/(1+(8.9%/2))^(15*2)

=2508.446

change in the bond’s price in dollars=2508.446-2865.452=-357.006

change in the bond’s price in percentage terms=(2508.446/2865.452)-1=-12.459%

the above is the answer

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