The yield to maturity for 15-year bonds is as follows for four different bond ra
ID: 2717536 • Letter: T
Question
The yield to maturity for 15-year bonds is as follows for four different bond rating categories. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Aaa 8.60% Aa1 8.80% Aa2 9.00% Aa3 10.00%
The bonds of Falter Corporation were rated as Aa1 and issued at par a few weeks ago. The bonds have just received a new rating of Aa3. Determine the new price of the bonds, assuming a 15-year maturity and semiannual interest payments
Explanation / Answer
Answer
With a Aa1 rating at issue, the coupon rate is 8.80.0% annually or 4.40% semiannually. With a downgrading to Aa3, the new yield to maturity is 10% or 5% semiannually
Present value of interest payments
PV A = A × PV IFA (n = 30, i = 5%)
PV A = $44 × 15.37245= $676.39
Present value of principal payment at maturity
PV = FV × PV IF (n = 30, i = 5%)
PV = $1,000 × 0.2314= $231.40
Total present value or price of a bond = PV of interest payments 9+ pV of principal = $907.80
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