Suppose that in the bond market, long-term bonds rated Aa currently offer yields to maturity of 3.5%. A-rated bonds sell at yields of 5.0%. Suppose that a 10-year semiannual bond with a coupon rate of 4.0% is downgraded by Moodys from an Aa to A rating.

a. What's the price of the bond before the downgrade? Is it a discount bond or a premium bond?

b. What's the price of the bond after the downgrade? Is it now a discount bond or a premium bond? C. What conclusion can you draw from part a and part b for the relationship between bond price and its default risk?

Show you calculation steps and keep 2 decimal places for your final answer. If you use a financial calculator, tell me your inputs and output (N, i/Y, PMT, PV, FV)