A $1,600 face value corporate bond with a 7.40 percent coupon (paid semiannually
ID: 2812350 • Letter: A
Question
A $1,600 face value corporate bond with a 7.40 percent coupon (paid semiannually) has 15 years left to maturity. It has had a credit rating of BB and a yield to maturity of 8.8 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 7.7 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))
A $1,600 face value corporate bond with a 7.40 percent coupon (paid semiannually) has 15 years left to maturity. It has had a credit rating of BB and a yield to maturity of 8.8 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 7.7 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))
Explanation / Answer
Using financial calculator BA II Plus - Input details:
At 8.8% YTM
At 7.7% YTM
I/Y = R = Rate or yield / frequency of coupon in a year =
4.400000
3.850000
PMT = Coupon rate x FV / frequency =
-$59.20
-$59.20
N = Number of years remaining x frequency =
30
30
FV = Future Value =
-$1,600.00
-$1,600.00
CPT > PV = Present value of bond =
$1,415.3985
$1,557.7327
Formula for bond value = |PMT| x ((1-((1+R%)^-N)) / R%) + (|FV|/(1+R%)^N)
$1,415.3985
$1,557.7327
Change in bond price in dollars = $1,557.7327-$1,415.3985 = $142.334
Change in bond price in percentage = ($1557.7327-$1415.3985)/ $1415.3985 = 10.056%
Using financial calculator BA II Plus - Input details:
At 8.8% YTM
At 7.7% YTM
I/Y = R = Rate or yield / frequency of coupon in a year =
4.400000
3.850000
PMT = Coupon rate x FV / frequency =
-$59.20
-$59.20
N = Number of years remaining x frequency =
30
30
FV = Future Value =
-$1,600.00
-$1,600.00
CPT > PV = Present value of bond =
$1,415.3985
$1,557.7327
Formula for bond value = |PMT| x ((1-((1+R%)^-N)) / R%) + (|FV|/(1+R%)^N)
$1,415.3985
$1,557.7327
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