Question

A $2,200 face value corporate bond with a 5.50 percent coupon (paid semiannually) has 10 years left to maturity. It has had a credit rating of BB and a yield to maturity of 7.6 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 6.7 percent. What will be the change in the bond’s price in dollars and percentage terms?

Answer 1

Answer:

Value when credit rating = BB and a yield to maturity = 7.6 percent.

Face value = $2,200

Time to maturity = 10 years = 10 * 2 = 20 semiannual periods

Semiannual coupon amount = 2200 * 5.50%/2 =$60.50

Semiannual yield to maturity = 7.6%/2 = 3.8%

To get price we will use PV function of excel:

= PV (rate, nper, pmt, fv, type)

= PV (3.8%, 20, -60.50, -2200, 0)

= $1880.43

Value when credit rating = BBB and a yield to maturity = 6.7 percent.

= PV (6.7%/2, 20, -60.50, -2200, 0)

= $2009.82

As such:

Change in bond's price in dollars = 2009.82 - 1880.43 = $129.39

Change in the bond’s price in percentage terms = 129.39 / 1880.43 = 6.88%

Change in bond's price in dollars = $129.39

Change in the bond’s price in percentage terms = 6.88%