Question

A $1,500 face value corporate bond with a 7.30 percent coupon (paid semiannually) has 15 years left to maturity. It has had a credit rating of BB and a yield to maturity of 8.7 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 7.6 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

Current price

Bond

K = Nx2

Bond Price =∑ [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =15x2

Bond Price =∑ [(7.3*1000/200)/(1 + 8.7/200)^k]     +   1000/(1 + 8.7/200)^15x2

k=1

Bond Price = 883.94

Change in YTM =-1.1

Bond

K = Nx2

Bond Price =∑ [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =15x2

Bond Price =∑ [(7.3*1000/200)/(1 + 7.6/200)^k]     +   1000/(1 + 7.6/200)^15x2

k=1

Bond Price = 973.420

%age change in price =(New price-Old price)*100/old price

%age change in price = (973.42-883.94)*100/883.94

= 10.123%