Question

Suppose you lend $X dollars to buy a bond with N coupons C, priced at par, and probability of default p in each period. Suppose that just after the k-th coupon the probability of default per period goes up. (Your remaining coupons will stay at C dollars per period.) What will happen to the value of your bond? What will happen if the probability of default goes down?

Answer 1

All other things remaining constant, a bond where there is no possibility of default or where probability of default is = 0, will be valued at a price higher than one where there is a probability of default.

Given that I lend $X dollars to buy a bond with N coupons C, priced at par, and probability of default p in each period. Suppose that just after the k-th coupon the probability of default per period goes up. However, my remaining coupons will stay at C dollars per period, the value of the bond falls.

Answer: If probability of default goes up, bond value goes down or decreases.

If probability of default goes down, bond value goes up or increases.