A firm with an AA rating likes to issue one million units of a 10 year-1.40%...
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A firm with an AA rating likes to issue one million units of a 10 year-1.40% bond with face value $100. The yearly coupon payment is $1.40. The yield curve is flat and the yield is 1%. The default spreads are given in the table below. (a) What is the amount the firm wants to raise? [1p] Before the issuance, the firm is downgraded to a B+ rating. (b) How much can this now B+ rated firm raise by selling one million units of the bond with $1.40 coupon? [1p] (c) If the firm keeps the coupon rate and wants to raise the planned amount, how many more bonds does it issue? [3p] What is the additional interest payment per year the firm has to pay? [2p] Suppose the firm wants to raise the same total amount and adjusts the coupon payment so as to sell the bond for $100 each. What is the new coupon rate? [3p] (f) What is the additional interest payment per year the firm has to pay? [2p] After the bond is issued, the central bank increases the interest rate. As a consequence, the yields go up. The yield curve is still flat and the yield is 4%. What is the price of the traded bond after the increase of the interest rate? [2p] (d) (e) Rating AAA AA A+ A A- BBB BB+ BB B+ B B- CCC CC C Default spread 0.20% 0.40% 0.60% 0.80% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.50% 8.00% 10.00% 12.00% 20.00% A firm with an AA rating likes to issue one million units of a 10 year-1.40% bond with face value $100. The yearly coupon payment is $1.40. The yield curve is flat and the yield is 1%. The default spreads are given in the table below. (a) What is the amount the firm wants to raise? [1p] Before the issuance, the firm is downgraded to a B+ rating. (b) How much can this now B+ rated firm raise by selling one million units of the bond with $1.40 coupon? [1p] (c) If the firm keeps the coupon rate and wants to raise the planned amount, how many more bonds does it issue? [3p] What is the additional interest payment per year the firm has to pay? [2p] Suppose the firm wants to raise the same total amount and adjusts the coupon payment so as to sell the bond for $100 each. What is the new coupon rate? [3p] (f) What is the additional interest payment per year the firm has to pay? [2p] After the bond is issued, the central bank increases the interest rate. As a consequence, the yields go up. The yield curve is still flat and the yield is 4%. What is the price of the traded bond after the increase of the interest rate? [2p] (d) (e) Rating AAA AA A+ A A- BBB BB+ BB B+ B B- CCC CC C Default spread 0.20% 0.40% 0.60% 0.80% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.50% 8.00% 10.00% 12.00% 20.00%
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Answer rating: 100% (QA)
a The amount the firm wants to raise is 1000000 b The B rated firm can raise 900000 by selling o... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date:
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