A corporate bond with a 6.8 percent coupon has 14 years left to maturity. It has

Question

A corporate bond with a 6.8 percent coupon 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.

  

What will be the change in the bond’s price in dollars? (Assume interest payments are semiannual.) (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places.)

  

  

What will be the change in the percentage? (Negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places.)

    

What will be the change in the bond’s price in dollars? (Assume interest payments are semiannual.) (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places.)

Explanation / Answer

Change in bond price:

= $840.79-$939.96

= -$99.17

% change:

= -$99.17/$939.96

= -10.55%

Face value (FV) $                                         1,000 Coupon rate 6.80% Number of compounding periods per year 2 Interest per period (PMT) $                                         34.00 Number of years to maturity 14 Number of compounding periods till maturity (NPER) 28 Market rate of return/Required rate of return 7.50% Market rate of return/Required rate of return per period (RATE) 3.75% Bond price PV(RATE,NPER,PMT,FV)*-1 Bond price before change of rating $                                       939.96

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