27. Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7%

(annual coupon payments) and a face value of $1000. Andrew believes it can get a rating of A from Standard & Poor’s. However, due to recent financial difficulties at the company, Standard & Poor’s is warning that it may downgrade Andrew Industries bonds to BBB. Yields on A-rated, long-term bonds are currently 6.5%, and yields on BBB-rated bonds are 6.9%.

a. What is the price of the bond if Andrew Industries maintains the A rating for the bond issue?

b. What will the price of the bond be if it is downgraded?