Explain issuance price of the bond

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ABC Inc. is a U.S. manufacturing firm. It is currently in the process of issuing 20-year bonds with face value of $10,000. They expect the bond to have a credit rating of "A", and comparable A-rated bonds in the market trade at a credit spread of 0.85% over the 20-year Treasury bond.

ABC Inc. will pay coupons twice a year with coupon rate 5.85%. The U.S. Treasury yield curve currently shows a 20-year yield of 3.25%.

a) What's the issuance price of the bond?

b) A year later, ABC Inc's sales shrink dramatically and its credit rating falls to "B". As a result, the credit spread increases to 2.75%. What's the new price of the bond?

c) If an investor bought the bond at issuance and they sell the bond immediately after receiving the third coupon (and ABC Inc. stays at credit rating "B"), what is the holding period return (or total return) in percentages on their investment in the bond? State all assumptions made.

Reference no: EM132955731

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