Question
A firm with an A rating plans to issue one million units of a 10 year-4% bond with face value $100. After the financial crisis
A firm with an A rating plans to issue one million units of a 10 year-4% bond with face value $100. After the financial crisis this firm is downgraded to a B rating. The yield curve increases 0.2% per year. The yield for year 1 is y1=1%, for year 2 is y2=1.2%, y3=1.4% and so on and y10=2.8%. The default spreads are given in the table below. (a) What is the initial amount (before downgrading) the firm wants to raise? (b) How much can this now B rated firm raise? (c) If the firm wants to raise the planned amount, how many more bonds does it issue?
Rating Default spread AAA 0.20% AA 0.40% A+ 0.60% A 0.80% A- 1.00% BBB 1.50% BB+ 2.00% BB 2.50% B+ 3.00% B 3.50% B- 4.50% CCC 8.00% CC 10.00% C 12.00% D 20.00%
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