Final answer:
The bond price will decrease when the discount rate increases from 8.1% to 9.4% due to the downgrade from BBB to BB. The change in the bond price in dollars is the difference between the prices calculated with the two yield rates, and the percentage change is computed by dividing the dollar change by the original price and multiplying by 100. Calculations specific to the bond's price changes require a financial calculator or present value formula.
Step-by-step explanation:
To determine the change in the bond price due to a change in the discount rate, we need to calculate the price of the bond before and after the bond's credit rating downgrade. A bond's price is the present value of its future coupon payments and the final face value payment, discounted back to the present using the current yield to maturity as the discount rate. For a bond paying semiannual coupons, this is done by dividing the annual coupon rate by two to get the semiannual coupon rate, then discounting each of these coupon payments, as well as the face value, back to the present using the semiannual yield to maturity.
Before the downgrade, the bond price can be calculated using the original yield to maturity of 8.1%, and after the downgrade, it can be recalculated using the new discount rate of 9.4%. The change in the bond price in dollars is the difference between these two prices. To calculate the change in price as a percentage, you would divide the change in price (in dollars) by the original bond price and multiply by 100.
However, specific calculations for the bond's price before and after the downgrade are not provided in this example, as it would require the use of a financial calculator or present value formula, both of which are beyond the scope of this answer. Generally, when the discount rate increases due to a credit rating downgrade (as it does when going from 8.1% to 9.4%), the present value of future cash flows decreases, resulting in a lower bond price. Hence, we can qualitatively say that the bond price will decrease and the yield to maturity will increase.