Question: Please solve the following questions with step-by-step solutions. Consider a firm with AA rating that wants to issue one million units of a 10 year-4%

Please solve the following questions with step-by-step solutions.

Consider a firm with AA rating that wants to issue one million units of a 10 year-4% bond. Each bond unit has a par value of $100. After the 2008 financial crisis, the credit rating agency S&P downgraded this firm to a B+ rating. Suppose the yield curve increases 0.2% per year. (The yield for year 1 is y₁=1%, for year 2 is y₂ =1.2%, y₃ =1.4% and so on and y₁₀ =2.8%.) The default spreads are given in the table below.

(1) Before downgrading, what is the initial amount the firm wants to raise?

(2) How much can the firm raise after being downgraded to B+?

(3) If the firm wants to raise the planned amount, how many more units of bonds does it have to issue?

(4) What is the additional interest payment per year the firm has to pay?

Rating Default spread AAA 0.20% AA 0.40% A+ 0.60% A 0.80% A- 1.00% BBB 1.50% BB+ 2.00% BB 2.50% B+ 3.00% B 3.50% B- 4.50% CCC 8.00% CC 10.00% C 12.00% D 20.00%

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