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Question: A corporate bond with a coupon rate of 6.8 percent has 14 years left to...
Question:
A corporate bond with a coupon rate of 6.8 percent has 14 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.5 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 8.8 percent. (Assume interest payments are semiannual.)
What will be the change in the bond's price in dollars? Round your final answer to 2 decimal places.
What will be the change in the percentage? Round your final answer to 2 decimal places.
Solutions
Expert Solution
| Change in YTM =1.3 |
| Bond |
| K = Nx2 |
| Bond Price =∑ [( Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 |
| k=1 |
| K =14x2 |
| Bond Price =∑ [(6.8*1000/200)/(1 + 8.8/200)^k] + 1000/(1 + 8.8/200)^14x2 |
| k=1 |
| Bond Price = 840.79 |
| change in price = (840.79-939.96) = -99.17 |
| %age change in price =(New price-Old price)*100/old price |
| %age change in price = (840.79-939.96)*100/939.96 |
| = -10.55% |
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