A corporate bond with a 5.75 percent coupon has 15 years left to maturity. It has had a credit rating of BB and a yield to maturity of 6.25 percent. The firm has recently gotten more financially stable and the rating agency is upgrading the bonds to BBB. The new appropriate discount rate will be 6.00 percent. What will be the change in the bond's price in dollars? (Assume interest payments are paid semiannually and a par value of $1,000.)
Compute the current bond price:
N = 30, I = 3.125, PMT = 28.75, FV = 1000, CPT PV = −951.78
Now compute the price after the rating change:
N = 30, I = 3.00, PMT = 28.75, FV = 1000, CPT PV = −975.50
So the dollar change in price is:
$975.50 − $951.78 = $23.72.
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