Question $7.(12$ points$)$ You are considering the following two different bonds to add to your

investment portfolio:

Maracas Company bonds have a face value of $$20,000$ and pay $$400$ every quarter.

Zildijian Company bonds are $10\%$ coupon bonds with a face value of $$20,000.$ Its coupons

will be paid on a quarterly basis.

Maracas bonds have a maturity of $8$ years and Zildijian bonds have a maturity of $6$ years. Both

bonds currently have a rating of AA from Standard and Poor's. However, due to recent economic

downturn, analysts suggested that the bonds may downgrade to a rating of BBB$.$

The following table summarizes the yield to maturity for bonds with various ratings:

What are the prices of the bonds if they maintain a rating of AA$?$

What will the price of the bonds be if they are downgraded to a rating of $BBB?$

Please explain which bond has higher interest rate risk $($Price risk$)?$You are considering the following two different bonds to add to your

investment portfolio:

$$ Maracas Company bonds have a face value of $$20,000$ and pay $$400$ every quarter.

$$ Zildijian Company bonds are $10\%$ coupon bonds with a face value of $$20,000.$ Its coupons

will be paid on a quarterly basis.

Maracas bonds have a maturity of $8$ years and Zildijian bonds have a maturity of $6$ years. Both

bonds currently have a rating of AA from Standard and Poor$$s$.$ However, due to recent economic

downturn, analysts suggested that the bonds may downgrade to a rating of BBB$.$

The following table summarizes the yield to maturity for bonds with various ratings:

Rating AAA AA A BBB BB

Yield $($APR compounded quarterly$)4\mathrm{.}3\%4\mathrm{.}9\%5\mathrm{.}6\%6\mathrm{.}8\%8\%$

$1.$ What are the prices of the bonds if they maintain a rating of AA$?$

$2.$ What will the price of the bonds be if they are downgraded to a rating of BBB$?$

$3.$ Please explain which bond has higher interest rate risk $($Price risk$)?$