Question
Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7.00% (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 7.00% (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 and Poor's is warning that it may downgrade Andrew Industries bonds to BBB. Yields on A-rated long-term bonds are currently 6.50%, and yields on BBB-rated bonds are 6.90%.
a. What is the price of the bond if Andrew 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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Advanced Accounting
Authors: Joe Hoyle, Thomas Schaefer, Timothy Doupnik
10th edition
0-07-794127-6, 978-0-07-79412, 978-0077431808
