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What will be the price of the bond if it is downgraded

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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 6.51%, and yields on BBB-rated bonds are 6.87%.

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?

Reference no: EM132892271

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