Question

a corporate bond with a 7 percent coupon has 15 years left to maturity. it has had a credit rating of bb and a yield to maturity of 8.7 percent. the firm has recently become more financially stable and the rating agency is upgrading the bonds to bbb. the new appropriate discount rate will be 7.6 percent. (assume interest payments are semiannual.) what will be the change in the percentage terms?

Answer 1

The change in percentage terms would be 7.55%.

Step-by-step explanation:

Rising interest rates affect bond prices because they often raise yields. In turn, rising yields can trigger a short-term drop in the value of your existing bonds. That's because investors will want to buy the bonds that offer a higher yield.

The increase in sovereign bond yields has pushed rates higher in the credit and mortgage markets resulting in a broad tightening of financial conditions.

When the demand for a particular bond increases, all else equal, its price will rise and its yield will fall. The supply of a bond depends on how much the issuer of a bond needs to borrow from the market, such as a government financing its expenditure.

Yield to Worst (YTW) is a financial metric that helps investors assess the minimum yield they can expect from a bond under various scenarios. It accounts for the bond's yield in the worst-case scenario, considering factors like call provisions, prepayments, and other features that may affect the bond's cash flows.

The change in percentage terms would be 7.55%. To calculate this, we need to find the difference between the old and new yield to maturity (8.7% - 7.6% = 1.1%) and divide it by the old yield to maturity (8.7%): (1.1% / 8.7%) x 100 = 7.55%. So, there will be a 7.55% change in the yield to maturity percentage terms.