Question
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
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 & Poors. However, due to recent financial difficulties at the company, Standard & Poors 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?
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Authors: Braun Schweiger
1st Edition
1493700391, 978-1493700394
