3. In real life bond’s credit rating provides a guide to its price . Here let’s assume something stronger – that all bonds with the same rating are priced equally . Suppose that the French government has just issued 10-year bonds with a coupon of 2%. Currently France has AA rating . Germany , that is still rated AAA, did not issue any securities recently but a 5% bond issued in 1982 that matures in December 2022 yield 1.3% . How much an investor holding that bond today would lose, when Germany was unexpectedly downgraded to AA?
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