Question

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

Answer 1

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