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A firm with an AA-rating plans to issue one million shares of a 4 year-10% bond with face value $100. After the financial crisis this firm is downgraded to a B rating. The risk free rate is 1%. The default spreads are given in the table below.
(a) What is the initial amount (before downgrading) the firm wants to raise?
(b) How much can this now B-rated firm raise?
(c) If the firm wants to raise the planned amount, how many more bonds does it issue? Rating Default spread
AAA 0.20% AA 0.40%
A+ 0.60% A 0.80% A- 1.00% BBB 1.50% BB+ 2.00% BB 2.50% B+ 3.25% B 4.00% B- 6.00% CCC 8.00% CC 10.00% C 12.00% D 20.00%
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