In: Finance
A $1,300 face value corporate bond with a 7.10 percent coupon (paid semiannually) has 15 years left to maturity. It has had a credit rating of BB and a yield to maturity of 8.5 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 7.4 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 |
Change in dollars = Old price - new price = 1,147.311 - 1265.018 = -117.707
Change in percentage = change in dollars/ old price * 100 = -117.707 / 1147.311 *100 = -10.259%
Old price:
Particulars | Cash flow | Discount factor | Discounted cash flow | |
Interest payments-Annuity (4.25%,30 periods) | 46.2 | 16.7790 | 774.35 | |
Principle payments -Present value (4.25%,30 periods) | 1,300 | 0.2869 | 372.96 | |
A | Bond price | 1,147.31 | ||
Face value | 1,300.00 | |||
Premium/(Discount) | -152.69 | |||
Interest amount: | ||||
Face value | 1,300 | |||
Coupon/stated Rate of interest | 7.10% | |||
Frequency of payment(once in) | 6 months | |||
B | Interest amount | 1300*0.071*6/12= | 46.15 | |
Present value calculation: | ||||
yield to maturity/Effective rate | 8.50% | |||
Effective interest per period(i) | 0.085*6/12= | 4.250% | ||
Number of periods: | ||||
Ref | Particulars | Amount | ||
a | Number of interest payments in a year | 2 | ||
b | Years to maturiy | 15.0 | ||
c=a*b | Number of periods | 30 |
New price:
Particulars | Cash flow | Discount factor | Discounted cash flow | |
Interest payments-Annuity (3.7%,30 periods) | 46.2 | 17.9397 | 827.92 | |
Principle payments -Present value (3.7%,30 periods) | 1,300 | 0.3362 | 437.10 | |
A | Bond price | 1,265.02 | ||
Face value | 1,300.00 | |||
Premium/(Discount) | -34.98 | |||
Interest amount: | ||||
Face value | 1,300 | |||
Coupon/stated Rate of interest | 7.10% | |||
Frequency of payment(once in) | 6 months | |||
B | Interest amount | 1300*0.071*6/12= | 46.15 | |
Present value calculation: | ||||
yield to maturity/Effective rate | 7.40% | |||
Effective interest per period(i) | 0.074*6/12= | 3.700% | ||
Number of periods: | ||||
Ref | Particulars | Amount | ||
a | Number of interest payments in a year | 2 | ||
b | Years to maturiy | 15.0 | ||
c=a*b | Number of periods | 30 |