4. Given the following yields for bonds with different credit ratings: Credit Rating Yield 3% AAA...

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4. Given the following yields for bonds with different credit ratings: Credit Rating Yield 3% AAA AA 3.2% A 3.5% BBB 3.8% BB 4.5% B 5.25% a. What would be the fair price of a 5-year maturity bond, which currently has identical risk to a bond rated 'A', if it has a coupon rate of 12% paid annually, and a par value of $1,000? b. What would be the price of the same bond 3 years from today if the bond is expected to be downgraded to 'BBB' at the end of the 3rd year? 4. Given the following yields for bonds with different credit ratings: Credit Rating Yield 3% AAA AA 3.2% A 3.5% BBB 3.8% BB 4.5% B 5.25% a. What would be the fair price of a 5-year maturity bond, which currently has identical risk to a bond rated 'A', if it has a coupon rate of 12% paid annually, and a par value of $1,000? b. What would be the price of the same bond 3 years from today if the bond is expected to be downgraded to 'BBB' at the end of the 3rd year?

Answer rating: 100% (QA)

a To determine the fair price of the bond we need to discount the future cash flows coupon payments ... View the full answer