Question
A bonds credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer yields to maturity of 6.9%. A-rated bonds sell at
A bonds credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer yields to maturity of 6.9%. A-rated bonds sell at yields of 7.2%. Suppose that a 10-year bond with a face value of $1,000 and a coupon rate of 6.4% is downgraded by Moodys from an Aa to A rating. Assume annual compounding. |
a. | What is the likely bond price before the downgrade? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
Initial price | $ |
b. | What is the likely bond price after the downgrade? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
New price | $ |
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