Given the following yields for bonds with different credit ratings;

Credit Rating Yield

AAA 3%

AA 3.2%

A 3.5%

BBB 3.8%

a. What would be the fair price of a 5-year maturity bond, which currently has identical risk to a bond rated A, if it has a coupon rate of 12% paid annually, and a par value of $1,000?

b. What would be the price of the same bond 3 years from today if the bond is expected to be downgraded to BBB at the end of the 3rd year?