Question

Andrew Industries is contemplating issuing a 30​-year bond with a coupon rate of 7.00 % ​(annual coupon​ payments) and a face value of $ 1 comma 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 6.50 %​, and yields on​ BBB-rated bonds are 6.90 %.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?

Answer 1

To calculate the price of the bond, we can use the present value formula. If Andrew Industries maintains an A rating, the price of the bond can be calculated using the yield rate for A-rated bonds.

Step-by-step explanation:

To calculate the price of the bond, we can use the present value formula. Since the bond is a 30-year bond with annual coupon payments, we need to discount the future cash flows back to the present value at the appropriate yield rate. If Andrew Industries maintains an A rating, the yield rate for A-rated bonds is 6.50%.

Using the present value formula, the price of the bond can be calculated as follows:

1. Calculate the present value of the annual coupon payments using the yield rate: