A corporate bond with a 5 percent coupon has 10 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 8.0 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 9 percent. What will be the change in the bond's price in dollars? Assume interest payments are paid semiannually and par value is $1,000.
Step 1: PMT = 25; N = 20; I = 4; FV = 1000; => PV = 796.15.
Step 2: PMT = 25; N = 20; I = 4.5; FV = 1000; => PV = 739.84 diff = −56.31.
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