acific Petroleum Pte Ltd has an outstanding 8% annual coupon five-year bond with a credit rating of BBB+. Unfortunately, one of its oil tankers collided into another carrier and resulted in a massive oil spill along the Straits of Malacca. This news led to an unexpected bond rating downgrade from BBB+ to BBB-. As at the time of the oil spill, BBB+ bonds yielded 3.5% and BBB- bonds yielded 4.5%.


Use the present value of annuity formula, discuss and calculate the effect on the bond price due to the oil spill.

Answer rating: 100% (QA)

The downgrade in bond rating from BBB to BBB will increase the required yield on the bond which in t... View the full answer