# Question

Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7% (annual coupon payments) and a face value of $1000. 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 6.5%, and yields on BBB-rated bonds are 6.9%.

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

b. What will the price of the bond be if it is downgraded?

a. What is the price of the bond if Andrew Industries 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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