Question

A $1,800 face value corporate bond with a 5.15 percent coupon (paid semiannually) has 10 years left to maturity. It has had a credit rating of BB and a yield to maturity of 7.2 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 6.3 percent. What will be the change in the bond’s price in dollars and percentage terms? (Round your answers to 3 decimal places. (e.g., 32.161))

PLEASE SHOW HOW TO PLUG THIS INTO A FINANCIAL CALCULATOR.

Answer 1

For BB Rating:

To find the Bond's Price, we need to put the following values in the financial calculator:

INPUT	10*2=20	7.2/2=3.6		(5.15%/2)*1,800=46.35	1,800
TVM	N	I/Y	PV	PMT	FV
OUTPUT			-1,540.14

Hence, price of the bond with BB rating = $ 1,540.14

For BBB Rating:

To find the Bond's Price, we need to put the following values in the financial calculator:

INPUT	10*2=20	6.3/2=3.15		(5.15%/2)*1,800=46.35	1,800
TVM	N	I/Y	PV	PMT	FV
OUTPUT			-1,648.13

Hence, price of the bond with BBB rating = $ 1,648.13

% change in price due to change in rating = [($1,648.13 - $1,540.14) / $1,540.14] x 100 = 7.01%

Change of price in dollar terms = $1,648.13 - $1,540.14 = $ 107.99