A bond’s credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer yields to maturity of 4.5%. A-rated bonds sell at yields of 4.8%. Suppose that a 10-year bond with a face value of $1,000 and a coupon rate of 4.0% is downgraded by Moody’s from an Aa to A rating. Assume annual compounding.
a. What is the likely bond price before the downgrade? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Initial price $
b. What is the likely bond price after the downgrade? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
New price $