The yield to maturity for 10-year bonds is as follows for four different bond ra

Question

The yield to maturity for 10-year bonds is as follows for four different bond rating categories. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

The bonds of Falter Corporation were rated as Aaa and issued at par a few weeks ago. The bonds have just received a new rating of Aa3. Determine the new price of the bonds, assuming a 10-year maturity and semiannual interest payments. (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

Explanation / Answer

Bonds of Falter Corporation were issued a few weeks ago at par. This ideally means that the coupon was equal to yield of the bonds. Since the bonds were issued with Aaa rating, coupon = yield = 10.20% p.a.

Now the bonds have received a Aa3 rating. Hence,

N = 10 years * 2 = 20

Coupon = 10.20% * 6/12 = 5.1%

FV = $100

Yield = 12% * 6/12 = 6%

Hence, price of the bond today = $89.68

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