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 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 6.50%​, and yields on​ BBB-rated bonds are 6.90%.

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?

a. What is the price of the bond if Andrew Industries maintains the A rating for the bond​ issue?

If Andrew maintains the A rating for the bond​ issue, the price of the bond is? (Round to the nearest​ cent.)

Can you please provide the needed steps to the answer?

Answer 1

Price=Coupon rate*par value/yield*(1-1/(1+yield)^years to maturity)+par value/(1+yield)^years to maturity

1.

=7%*1000/6.5%*(1-1/1.065^30)+1000/1.065^30

=1065.29

2.

=7%*1000/6.9%*(1-1/1.069^30)+1000/1.069^30

=1012.23