Question
Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 5.45% (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 5.45% (annual coupon payments) and a face value of $1,000. Andrew believes it can get a rating of A from Standard and & 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 4.95%, and yields on BBB-rated bonds are 5.35%.
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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Introduction to Managerial Accounting
Authors: Peter C. Brewer, Ray H Garrison, Eric Noreen, Suresh Kalagnanam, Ganesh Vaidyanathan
4th Canadian edition
978-1259103261
