Question

In 2003, Duke Energy issued $60 million face value bonds, with a 7 ½% coupon rate and a maturity date of 2033.  The bonds are trading at 102. Given this information, the yield to maturity on these bonds as of today (2020) would be ________%.

This is a follow-up to the preceding quesiton about Duke Energy bonds. Let's say that right after making calculating the YTM for these bonds, you heard a "late-breaking news flash" which said that Duke Energy’s recent financial dealings are coming under investigation. As a result, the major bond rating agencies have down-graded Duke’s debt from “investment” to “speculative” grade. You didn’t quite catch the full story, but you did hear that analysts expect the YTM on these bonds to change by 2 full percentage points. Which do you think it will be-- a 2% increase or a 2% decrease--and why?

Group of answer choices

It will be a 2% decrease due to an increase in risk.

There will be no change since debt represents a first claim on Duke's income and assets.

It will be a 2% decrease due to decreased demand for Duke Energy bonds.

It will be a 2% decrease due to decreased demand for Duke Energy bonds.

It will be a 2% increase due to an increase in risk.

Answer 1

Solution :-

Face Value of Bond = $100

Bond Price = $102

Time to maturity = 30 Years

Coupon Amount = $100 * 7.5% = $7.5

Therefore Yield to maturity = 7.33%

Solution :- (b)

The Correct Answer is (D) that is It will be a 2% increase due to an increase in risk.

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