Question

The yield to maturity for 25-year bonds is as follows for four different bond rating categories. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Aaa	10.00%
Aa1	10.60%
Aa2	11.00%
Aa3	11.40%

The bonds of Falter Corporation were rated as Aa2 and issued at par a few weeks ago. The bonds have just been downgraded to Aaa. Determine the new price of the bonds, assuming a 25-year maturity and semiannual interest payments. (Do not round intermediate calculations and round your answer to 2 decimal places.)

The rate goes down to Aaa

Answer 1

There is a typo it should not be downgraded rather upgraded..As Aaa is higher rating than Aa2..Hence showing both cases

Price of bond assuming current rating after upgrade as Aaa=11%*1000/10%*(1-1/1.05^50)+1000/1.05^50=1091.2796273

Price of the bond assuming current rating after downgrade as Aa2=10%*1000/11%*(1-1/1.055^50)+1000/1.055^50
=915.3424105