General Motors (GM) has just issued a new bond with a 10-year maturity, 10% coupon rate, and $1,000 face value. The GM bond carries a credit rating of AA by the Standard & Poors. Assume that bond investors required rate of return is 12%. Please answer the following questions:

1. Please explain the purposes of bond credit ratings.

2. Please calculate the price of the bond, assuming annual coupon payments.

3Suppose Standard and Poors downgrades GMs credit rating from AA to BBB, how will this change affect the price of the bond? Please explain.

4. Suppose the Federal Reserve suddenly cut interest rates. What is the immediate impact on the price of the bond? Please explain.