Question

A $1,000 face value corporate bond with a 6.75 percent coupon
(paid semiannually) has 10 years left to maturity. It has had a
credit rating of BB and a yield to maturity of 8.2 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 7.1 percent. What will be the change in the bond’s price in
dollars and percentage terms? r**ound your answers to 3
decimal places.** **(e.g.,
32.161)****)**

Answer #1

Assuming interest payments are done semi annually

**Computing the current bond price:**

Bond price = $33.75 * [(1-1/(1+0.041)^20)/0.041] + 1000/(1+0.041)^20

= $454.64+$447.70

= $902.34

Or N = 20, I = 4.1, PMT = 33.75, FV = 1000 CPT PV = -902.34

**Now computing the price after the rate
change:**

Bond Price = $33.75 * [(1-1/(1+0.0355)^20)/0.0355]+ 1000/(1+0.0355)^20

= $477.51+$497.73

= $975.24

Or N = 2-, I = 3.55, PMT = 33.75, FV = 1000 CPT PV = -975.24

**So the dollar change in price is**

$975.24 - $902.34 = $72.90

**The percentage return is : 72.90 / 902.34 =
8.08%.**

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