Question: Using calculating formula Credit Rating Yield AAA 3% AA 3.2% A 3.5% BBB 3.8% BB 4.5% B 5.25% a. Given the yields for bonds with

Using calculating formula

Credit Rating Yield

AAA 3%

AA 3.2%

A 3.5%

BBB 3.8%

BB 4.5%

B 5.25%

a. Given the yields for bonds with different credit ratings, 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 bond 3 years from today if the bond is expected to be downgraded to BBB at the end of the 3rd year?

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