The yield to maturity for 15-year bonds is as follows for four different bond ra
ID: 2779450 • 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.
The bonds of Falter Corporation were rated as Aaa and issued at par a few weeks ago. The bonds have just received a new rating of Aa1. Determine the new price of the bonds, assuming a 15-year maturity and semiannual interest payments. (Do not round intermediate calculations and round your answer to 2 decimal places.)
What is the price of the bonds?
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.
Explanation / Answer
With a Aaa rating at issue, the coupon rate is 9.8% annually or 4.9% semiannually. With a downgrading to Aa1, the new yield to maturity is 10% or 5% semiannually.
Present value of interest payments
PVA = A x PVIFA (n = 30, i = 5%) Appendix D
PVA = $49 x 15.37 = $753.13
Present value of principal payment at maturity
PV = FV x PVIF (n = 30, i = 5%) Appendix B
PV = $1,000 x .231 = $231
Total present value of the bond
Present value of interest payments $753.13
Present value of payment at maturity $231.00
Total present value or price of the bond $984.13
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