Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of
ID: 2807626 • Letter: A
Question
Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7.13% (annual coupon payments) and a face value of $1,000. 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 6.43%, and yields on BBB-rated bonds are 6.84%.
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?
Explanation / Answer
Rating = A Rating = BBB FV 1000 FV 1000 PMT 71.3 (1000 x 7.13%) PMT 71.3 (1000 x 7.13%) N 30 N 30 rate(I/Y) 6.43% rate(I/Y) 6.84% PV ? PV ? price = ($1,092.08) price = ($1,036.57) PV(6.43%,30,71.3,1000) PV(6.84%,30,71.3,1000)