Question

- Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7.50% (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 and Poor's is warning that it may downgrade Andrew Industries bonds to BBB. Yields on A-rated long-term bonds are currently 7.00%, and yields on BBB-rated bonds are 7.40%.

(a) What is the price of the bond if Andrew maintains the A rating for the bond issue? $_____. (Round to the nearest cent.)

(b) What will the price of the bond be if it is downgraded? $_____. (Round to the nearest cent.)

Answer 1

a.Information provided:

Face value= future value= $1,000

Time= 30 years

Yield to maturity= 7%

Coupon rate= 7.50%

Coupon payment= 0.075*1,000= $75

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 75

I/Y= 7

N= 30

Press the CPT key and PV to compute the present value.

The value obtained is 1,062.05.

Therefore, the price of the bond if Andrew maintains A rating is $1,062.05.

b.

.Information provided:

Face value= future value= $1,000

Time= 30 years

Yield to maturity= 7.40%

Coupon rate= 7.50%

Coupon payment= 0.075*1,000= $75

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 75

I/Y= 7.40

N= 30

Press the CPT key and PV to compute the present value.

The value obtained is 1,011.93.

Therefore, the price of the bond if the bond is downgraded is $1,011.93.