Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of
ID: 2807269 • Letter: A
Question
Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7.11% annual coupon payments) and a face value of $1,000. Andrew believes it can get a rating of A from Standard & Poors. 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 6.57%, and yields on BBB-rated bonds are 6.78% a. What is the price of the bond if Andrew Industries maintains the A rating for the bond issue? b. What will be the price of the bond if it is downgraded? a. What is the price of the bond if Andrew Industries maintains the A rating for the bond issue? If Andrew maintains the A rating for the bond issue, the price of the bond is s(Round to the nearest cent.)Explanation / Answer
A. If Andrew Industries maintains A ratings for 30-Year Bonds, the price of the bonds would be;
Price = Coupon Interest Rates* PVIFA (Yield%, nyears) + Face Value of the Bond * PVIF (Yield%, nyears)
Years = 30
Yield for A rated Bonds = 6.57%
Coupon Interest = Coupon Rate* Face Value of the bond = $1000*7.11% = $71.10
Price = $71.10* pvifa (6.57%, 30yrs) + $1000* pvif (6.57%, 30yrs)
Price = $71.10* (12.96) + $1000*(0.1482)
Price = $1069.70
B. If Andrew Industries is downgraded to BBB ratings then for 30-Year Bonds, the price of the bonds would be;
Price = Coupon Interest Rates* PVIFA (Yield%, nyears) + Face Value of the Bond * PVIF (Yield%, nyears)
Years = 30
Yield for A rated Bonds = 6.78%
Coupon Interest = Coupon Rate* Face Value of the bond = $1000*7.11% = $71.10
Price = $71.10* pvifa (6.78%, 30yrs) + $1000* pvif (6.78%, 30yrs)
Price = $71.10* (12.69) + $1000*(0.1397)
Price = $1041.95