A $1,500 face value corporate bond with a 7.30 percent coupon (paid semiannually

Question

A $1,500 face value corporate bond with a 7.30 percent coupon (paid semiannually) has 15 years left to maturity. It has had a credit rating of BB and a yield to maturity of 8.7 percent. The firm recently became more financially stable and the rating agency is upgrading the bonds to BBB. The new appropriate discount rate will be 7.6 percent. What will be the change in the bond’s price in dollars and percentage terms? (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

Bond price at BB rating

=(1500*7.30%/2)*((1-(1+(8.7%/2))^(-15*2))/(8.7%/2))+1500/(1+(8.7%/2))^(15*2)

=1325.907

Bond price at BBB rating

=(1500*7.30%/2)*((1-(1+(7.60%/2))^(-15*2))/(7.60%/2))+1500/(1+(7.60%/2))^(15*2)

=1460.130

change in the bond’s price in dollars=1460.130-1325.907=134.223

change in the bond’s price in percentage terms=134.223/1325.907=10.123%

the above is the answer

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