Unit 5 Case (Gitman Chapter 6) Evaluating Annie Heggs Proposed Investment in Atilier Industries Bonds Annie Hegg has been considering investing in the bonds of Atilier Industries. The bonds were issued 5 years ago at their $1,000 par value and have exactly 25 years remaining until they mature. They have an 8.0% coupon interest rate, are convertible into 50 shares of common stock, and can be called any time at $1,080.00. The bond is rated Aa by Moodys.

Atilier Industries, a manufacturer of sporting goods, recently acquired a small athletic-wear company that was in financial distress. As a result of the acquisition, Moodys and other rating agencies are considering a rating change for Atilier bonds. Recent economic data suggest that expected inflation, currently at 5.0% annually, is likely to increase to a 6.0% annual rate.

e. If the Atilier bonds are downrated by Moodys from Aa to A, and if such a rating change will result in an increase in the required return from 8.0% to 8.75%, what impact will this have on the bond value, assuming annual interest? f. If Annie buys the bond today at its $1,000 par value and holds it for exactly 3 years, at which time the required return is 7.0%, how much of a gain or loss will she experience in the value of the bond (ignoring interest already received and assuming annual interest)?