a. Question 7: Annie Hegg has been considering investing in the bonds of Atilier Industries. The bonds were issued 5 years ago at their $1,000 par value and have exactly 25 years remaining until they mature. They have an 8% coupon interest rate, are convertible into 50 shares of common stock, and can be called any time at $1,080. The bond is rated Aa by Moody's. Atelier Industries, a manufacturer of sporting goods, recently acquired a small athletic-wear company that was in financial distress. As a result of the acquisition, Moody's and other rating agen- cies are considering a rating change for Atelier bonds. Recent economic data suggest that inflation, currently at 5% annually, is likely to increase to a 6% annual rate. Annie remains interested in the Atelier bond but is concerned about inflation, a potential rating change, and maturity risk. In order to get a feel for the potential impact of these factors on the bond value, she decided to apply the valuation techniques she learned in her finance course. Required If the price of the common stock into which the bond is convertible rises to $30 per share after 5 years and the issuer calls the bonds at $1,080, should Annie let the bond be called away from her or should she convert it into common stock? b. For each of the following required returns, calculate the bond's value, assum- ing annual interest. Indicate whether the bond will sell at a discount, at a pre- mium, or at par value. c. Repeat the calculations in part b, assuming that interest is paid semiannually and that the semiannual required returns are one-half of those shown. Compare and discuss differences between the bond values for each required return calculated here and in part b under the annual versus semiannual payment assumptions. d. If Annie strongly believes that inflation will rise by 1% during the next 6 months, what is the most she should pay for the bond, assuming annual interest? e. If the Atelier bonds are down rated by Moody's from Aa to A, and if such a rating change will result in an increase in the required return from 8% to 8.75%, what impact will this have on the bond value, assuming annual interest? f. If Annie buys the bond today at its $1,000 par value and holds it for exactly 3 years, at which time the required return is 7%, how much of a gain or loss will she experience in the value of the bond (ignoring interest already received and assuming annual interest)? a