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

Andrew Industries is contemplating issuing a 30-year bond with a rate of 7% (annual payments) and a 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?

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Plan Given the bonds yield to maturity we can compute the price using Eq 63 Note that the cash flows of this bond are an annuity of 30 payments of 70 paid annually and one lumpsum cash flow ... View full answer

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