Problem 7-40 Bond Ratings and Prices (LG7) A corporate bond with a 6.900 percent
ID: 2769643 • Letter: P
Question
Problem 7-40 Bond Ratings and Prices (LG7) A corporate bond with a 6.900 percent coupon has thirteen years left to maturity. It has had a credit rating of BB and a yield to maturity of 8.5 percent. The firm has recently become more financially stable and the rating agency is upgrading the bonds to BBB. The new appropriate discount rate will be 7.4 percent.
What will be the change in the bond’s price in dollars? (Assume interest payments are semiannual.) (Do not round intermediate calculations and round your final answer to 2 decimal places.) Change in bond price $
What will be the change in the percentage terms? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Change in bond percent %
Explanation / Answer
Revised calculation
Price of Bond with BB Rating Assume par value =1000 Annual Coupon @6.9%=69 YTM =8.5% Bond Price calculation: Years Cash Flow from Interest & Maturity PV factor @8.5% PV of Cash flows Year 1 69 0.922 64 Year 2 69 0.849 59 Year 3 69 0.783 54 Year 4 69 0.722 50 Year 5 69 0.665 46 Year 6 69 0.613 42 Year 7 69 0.565 39 Year 8 69 0.521 36 Year 9 69 0.480 33 Year 10 69 0.442 31 Year 11 69 0.408 28 Year 12 69 0.376 26 Year 13 1,069 0.346 370 Total 876.94 Bond Price at YTM level 8.5%= $ 876.94 Price of Bond with BBB Rating YTM =7.4% Years Cash Flow from Interest & Maturity PV factor @7.4% PV of Cash flows Year 1 69 0.931 64 Year 2 69 0.867 60 Year 3 69 0.807 56 Year 4 69 0.752 52 Year 5 69 0.700 48 Year 6 69 0.652 45 Year 7 69 0.607 42 Year 8 69 0.565 39 Year 9 69 0.526 36 Year 10 69 0.490 34 Year 11 69 0.456 31 Year 12 69 0.425 29 Year 13 1,069 0.395 423 Total 959.14 Bond Price at YTM level 7.4%= $ 959.14 YTM 8.5% YTM 7.4% % Change % change in Price of Bond $ 876.94 $ 959.14 9.37%