Question

A corporate bond with a 3.95% coupon has 21 years left to maturity.   It has had a credit rating of BBB and a yield to maturity of 5.35%. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate for a bond with this level of credit risk and time to maturity is 6.55%.

What will be the net change in the bond’s price in dollars if this rating downgrade and associated new discount rate occurred today? (Assume interest payments are semiannual; round and display your answer to 2 decimal places i.e. 1.23)

Answer 1

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- 2x m Find & Select Formula BarLG BOND - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Σ AutoSum : A Calibri -11AA = = = Dr Wrap Text General Ea Copy Fill 2 Paste BI U D- DA E E E s FMerce Merge & Center - Center $ Format Painter % % , 4.0 .00 :.: Conditional Format Cell Insert Delete Format Sort & Formatting as Table Styles 2 Clear Filter Clipboard Font Alignment Number Styles Cells Editing LC114 - for _ KSKT KU KV KW KX KY KZ LA LB LC LD LE 112 BBB RATING 113 YTM 5.35% 114 COUPON 3.95% 115 LIFE YEARS 21 116 FACE VALUE 1000 117 COUPON ($) ANNUAL 39.5 118 PERIODS IN A YEAR 119 PRICE OF THE BOND 824.67 [=PV(KY113/KY118,KY115*KY118,-KY117/KY118,-KY116)] 120 121 b BB RATING 122 YTM 6.55% 123 COUPON 3.95% 124 LIFE YEARS 21 125 FACE VALUE 1000 COUPON ($) ANNUAL 39.5 PERIODS IN A YEAR PRICE OF THE BOND 705.60 [=PV(KY122/KY127,KY124*KY127,-KY126/KY127,-KY125)] 129 ANSWER PRICE CHANGE IN DOLLAR TERMS -119.06 [705.60 -824.67] 126 127 128 130 ► Sheet2 AFN BANKING NOTE 51 53 CLEAN PRICE S10 BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATION WARRANT refund S5 0 0 YIELD SPOT ferences S4 80 S6 120% Rea ELEB * * 10 ENG 08-11-2019