Question

Andrew Industries is contemplating issuing a 30​-year bond with a coupon rate of 7.11 % ​(annual coupon​ payments) and a face value of $1,000. Andrew believes it can get a rating of A from Standard​ & 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 6.58 %​, and yields on​ BBB-rated bonds are 6.73 %.

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?

Answer 1

a

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =30

Bond Price =∑ [(7.11*1000/100)/(1 + 6.58/100)^k]     +   1000/(1 + 6.58/100)^30

k=1

Bond Price = 1068.64

b

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =30

Bond Price =∑ [(7.11*1000/100)/(1 + 6.73/100)^k]     +   1000/(1 + 6.73/100)^30

k=1

Bond Price = 1048.46