2.

Andrew Industries is contemplating issuing a 30 -year bond with a coupon rate of 7.12% (annual coupon payments) and a face value of $1,000. 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 6.56%, and yields on BBB-rated bonds are 6.75%. a. What is the price of the bond if Andrew Industries maintains the A rating for the bond issue? b. What will be the price of the bond if it is downgraded? Your company currently has 7% coupon-rate bonds (coupons are paid semi-annually) with ten years to maturity and a price of $1081. If you want to issue new 10-year coupon bonds at par, what coupon rate do you need to set? (Assume that for both bonds, the next coupon payment is due in exactly 6 months.) You need to set a coupon rate of \%. (Round to two decimal places.)