Question

The yield to maturity for 10-year bonds is as follows for four different bond rating categories....

The yield to maturity for 10-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 Aaa and issued at par a few weeks ago. The bonds have just been downgraded to Aa2. Determine the new price of the bonds, assuming a 10-year maturity and semiannual interest payments. (Do not round intermediate calculations and round your answer to 2 decimal places.)

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Answer #1

When the bond was issued at par, it would have implied the coupon rate was equal to yield to maturity.

Hence, the coupon rate = 8.60%.

When the bond is downgraded, new YTM = 9%

M = $1000, n = 10 * 2 = 20 semi-annual periods, C = 8.60% * $1000/2 = $43 (semi-annually), i = 9%/2 = 4.5% (semi-annually)

P = $559.34 + $414.64

P = $973.98

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