Question
Microsoft is an AAA-rated firm. It has a 16-year bond with an annual coupon rate of 4% paid semi-annually. The bond is selling for 105.
Microsoft is an AAA-rated firm. It has a 16-year bond with an annual coupon rate of 4% paid semi-annually. The bond is selling for 105.
a.What is the yield to maturity of this bond?
b.The new Windows software has had abysmal sales, and as a result, the firm is downgraded to AA-rated. The yield to maturity on AA-rated bonds is 5% per year. What will be the price of the above bond after the downgrade?
c. Calculate the percentage in bond price from part (a) to part (b). Why do you think the bond price changed by such a large percentage?
Step by Step Solution
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Step: 1
Answer a To find the yield to maturity of the bond we can use the bond pricing formula Bond Price C ...
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Fixed Income Analysis
Authors: Barbara S. Petitt
5th Edition
1119850541, 978-1119850540
