Question

A corporate bond with a coupon rate of 8.3 percent has 15 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 9.0 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 10.3 percent. (Assume interest payments are semiannual.)

What will be the change in the bond’s price in dollars?

What will be the change in the percentage?

Answer 1

Bond Par Value = $1,000

Coupon Rate = 8.3%

Time to maturity = 15 years

When YTM = 9%

Calculating Value of Bond,

Using TVM Calculation,

PV = [FV = 1000, T = 15, PMT = 83, I = 0.09]

Value of Bond = $943.58

After downgrading, YTM = 10.3%

Calculating Value of Bond,

Using TVM Calculation,

PV = [FV = 1000, T = 15, PMT = 83, I = 0.103]

Value of Bond = $850.45

a.

Change in Bond Price = 850.45 - 943.58

Change in Bond Price = -$93.13

b.

Percentage change in Bond Price = (850.45 - 943.58)/943.58

Percentage change in Bond Price = -9.87%