Question

just question 35

35. Credit Risk. A bond's credit rating provides a guide to its risk. Suppose that long-term bonds rated Aa currently offer yields to maturity of 7.5%. A-rated bonds sell at yields of 7.8%. Sup. pose that a 10-year bond with a coupon rate of 7.6% is downgraded by Moody's from an Aato A rating. (L06-5) a. Is the bond likely to sell above or below par value before the downgrade? b. Is the bond likely to sell above or below par value after the downgrade?

Answer 1

COupon Rate > Required Ret - Bond will be sold at Premium

COupon Rate < Required Ret - Bond will be sold at discount

Thus before down grading Bond will be sold at Premium ( 7.6% > 7.5%)

AFter Down Grading Bond will be sold at Discount ( 7.6% < 7.8%)