Question

Asked Apr 17, 2019

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The four different bond ratings below have a yeild to maturity for 10 year bonds.

Baa 9.40%

Ba1 9.60%

Ba2 10.00%

Ba3 10.60%

The bonds of Parrot Corp. were rated as Baa (9.40%) and issued at par a few weeks ago. The bonds have just been downgraded to Ba2 (10.00%) . Determine the new price of the bonds, assuming a 10-year maturity and semi-annual interest payments.

1 Rating

Step 1

The bonds of Parrot Corp. were rated as Baa and issued at par a few weeks ago. The yiled corresponding to the rating Baa is 9.40%. SInce the bonds were issued at par, the coupon on the bond, C = yield = 9.40%

The bonds have just been downgraded to Ba2. So the yield corresponding to Ba2 rating is 10.00%. Hence the revised yield of the bond now is 10.00%

Step 2

So we need to find the price of the bond with coupon, C = 9.40% and yield = 10.00%.

Payment frequency = Semi annual, Period = half year.

Hence the parameters of the bond will be:

Periodic coupon = C' = Semi annual coupon = C / 2 x Face Value = 9.40% / 2 x 1,000 =$ 47

Yield per perio...

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