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A $1,500 face value corporate bond with a 7.30 percent coupon (paid semiannually) has 15 years...

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Finance

A $1,500 face value corporate bond with a 7.30 percent coupon(paid semiannually) has 15 years left to maturity. It has had acredit rating of BB and a yield to maturity of 8.7 percent. Thefirm recently became more financially stable and the rating agencyis upgrading the bonds to BBB. The new appropriate discount ratewill be 7.6 percent. What will be the change in the bond’s price indollars and percentage terms? (Round your answers to 3 decimalplaces. (e.g., 32.161))

Change in the bond’s price indollars
Change in the bond’s pricein percentage%

Answer & Explanation Solved by verified expert
4.1 Ratings (532 Votes)

Current price
Bond
                  K = Nx2
Bond Price =? [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2
                   k=1
                  K =15x2
Bond Price =? [(7.3*1000/200)/(1 + 8.7/200)^k]     +   1000/(1 + 8.7/200)^15x2
                   k=1
Bond Price = 883.94
Change in YTM =-1.1
Bond
                  K = Nx2
Bond Price =? [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2
                   k=1
                  K =15x2
Bond Price =? [(7.3*1000/200)/(1 + 7.6/200)^k]     +   1000/(1 + 7.6/200)^15x2
                   k=1
Bond Price = 973.420
%age change in price =(New price-Old price)*100/old price
%age change in price = (973.42-883.94)*100/883.94
= 10.123%

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Transcribed Image Text

A $1,500 face value corporate bond with a 7.30 percent coupon(paid semiannually) has 15 years left to maturity. It has had acredit rating of BB and a yield to maturity of 8.7 percent. Thefirm recently became more financially stable and the rating agencyis upgrading the bonds to BBB. The new appropriate discount ratewill be 7.6 percent. What will be the change in the bond’s price indollars and percentage terms? (Round your answers to 3 decimalplaces. (e.g., 32.161))Change in the bond’s price indollarsChange in the bond’s pricein percentage%

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