A $1,000 face value corporate bond with a 6.5 percent coupon (paid semiannually) has 15 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.2 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 8.5 percent. What will be the change in the bond’s price in dollars and percentage terms?
We can use PV () function in excel to find the value of bond at two different rates and can calculate the change
NPER = number of coupon payments
FV = Par value
PMT = coupon payment
RATE = Yield
With 7.2% yield
with 8.5% yield
% change in price with change in yield = ( 832.21 - 936.43 ) / 936.43 = - 11.129%
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