Credit Rating Yield AAA 3% AA 3.2% A 3.5% BBB 3.8% BB B 4.5% 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...

Credit Rating Yield

AAA 3% AA 3.2% A 3.5% BBB 3.8%

BB B

4.5% 5.25%

1. 
   

   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?

   
   


2. 
   

   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?