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Philadelphia Electric Company is planning to conduct a $100,000,000 renovation of one of its oldest plants. To that end, in conjunction with their investment banker

Philadelphia Electric Company is planning to conduct a $100,000,000 renovation of one of its oldest plants. To that end, in conjunction with their investment banker Morgan Lynch, they will need to raise the needed capital in the public markets by issuing a new bond through the primary market. This new issue will have a 20-year maturity (semi-annual pay), as it will provide funding life equal to the anticipated life of the new plant.

Based on current conditions, the building block method will be used to estimate the yield necessary to raise the full amount. The market provides the following guidance:

Real return premium = 1.0%

Inflation expectation premium = 2.0%

Maturity risk premium = 0.75%

Default risk premium = 1.25%

Liquidity premium = 0.50%

  1. Based on this information, what will be the coupon rate on this twenty-year bond?
  2. What is the price of this semi-annual bond on issue date?
  3. What is the semi-annual payment per bond?
  4. Within a couple of days of issuance, a quarterly report from the company suggests that they are losing significant revenues to alternative energy providers. Based on the report, Moodys, a credit rating company, drops Philadelphia Electrics bond credit rating on the bond from A to BBB. Based on the new information, what will be the new price of the bond? (It pays semi-annually)

*SHOW ALL WORK*

AAA = 0.5%

AA = 1.0%

A = 1.25%

BBB = 2.0%

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