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Bond Price after Downgrade

A bond's credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer yields to maturity of 8.2%. A-rated bonds sell at yields of 8.5%. Assume a 10-year bond with a coupon rate of 7.7% is downgraded by Moody's from Aa to A rating.

a. Calculate the initial price. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Initial price $

b. Calculate the new price. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

New price $

Solution Preview

(a) You can PV function in Excel to compute the initial price...

Assume face value ...

Solution Summary

The solution uses excel function to compute bond price after a downgrade from Moody's.

$2.19