Question

A bond's credit rating provides a guide to its price. Assume Aaa bonds yield 3.9% and Baa bonds yield 4.9%. Assume a 10% five-year bond with annual coupons and a face value of $1,000. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

a. What is the bond's price if it is rated as Aaa?

b. What is the bond's price if it is rated as Baa?

Answer 1

Par Value of Bond = $1000

Annual coupon rate = 10%

Coupon payment = $1000*10% = $100

Maturity(n) = 5 years

a). Aaa's bond yield (YTM) = 3.9%

Calculating the price of Aaa's Bond:

Price = $ 446.44+ $825.89

Price = $ 1272.33

So, the bond's price if it is rated as Aaa is $ 1272.33

b). Baa's bond yield (YTM) = 4.9%

Calculating the price of Baa's Bond:

Price = $ 434.15+ $ 787.27

Price = $ 1221.42

So, the bond's price if it is rated as Aaa is $ 1221.42

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