A $1,100 face value corporate bond with a 6.60 percent coupon (paid semiannually

Question

A $1,100 face value corporate bond with a 6.60 percent coupon (paid semiannually) has 10 years left to maturity. It has had a credit rating of BB and a yield to maturity of 8.3 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 7.2 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))

Explanation / Answer

Bond price at bond rating BB=(1100*6.60%/2)*((1-(1+(8.3%/2))^(-10*2))/(8.3%/2))+1100/(1+(8.3%/2))^(10*2)=974.60

Bond price at bond rating BBB=(1100*6.60%/2)*((1-(1+(7.2%/2))^(-10*2))/(7.2%/2))+1100/(1+(7.2%/2))^(10*2)=1053.52

Change in the bond’s price in dollars=1053.52-974.60=78.92

Change in the bond’s price in percentage=78.92/974.60=8.10%

the above are the answers

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