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5) Credit Rating Yield AAA 3% AA 3.2% A 3.5% BBB 3.8% BB 4.5% B 5.25%...

5) Credit Rating Yield
AAA 3%
AA 3.2%
A 3.5%
BBB 3.8%
BB 4.5%
B 5.25%


a) Given the yields for bonds with different credit ratings, what would be the fair price of a 5-year maturity bond, which currently has identical risk to a bond rated ‘A’, if it has a coupon rate of 12% paid annually, and a par value of $1,000?


b) What would be the price of the bond 3 years from today if the bond is expected to be downgraded to ‘BBB’ at the end of the 3rd year?

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