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

Question

Question

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

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?

business finance

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Answer 1

Answer #1

a) Yield for 'A' rated bond 3.50%

Coupon 12%

FV 1000

Term 5 years

Price = PV $1,383.78 =-PV(3.5%,5,1000*12%,1000,)

b) Price after three years

Yield for 'BBB' rated bond 3.80%

Coupon 12%

FV 1000

Term 2 years

Price = PV $1,155.10 =-PV(3.8%,2,1000*12%,1000,)

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Answer 2

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