Question
Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7.11% (annual coupon payments) and a face value of $1,000. Andrew believes
Andrew Industries is contemplating issuing a 30-year
bond with a coupon rate of 7.11% (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 6.42%, and yields on BBB-rated bonds are 6.71%.
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?
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Short Term Financial Management
Authors: Ned C. Hill, William L. Sartoris
3rd Edition
0023548320, 978-0023548321
