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Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7% (annual coupon...

Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7% (annual coupon payments) and a face value of $1000. 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 6.5%, and yields on BBB-rated bonds are 6.9%.

(A) What is the price of the bond if Andrew Industries maintains the A rating for the bond issue?

(B) What will the price of the bond be if it is downgraded?

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Answer #1

a)

Coupon = 0.07 * 1000 = $70

price of bond = Annuity * [1 - 1 / (1 + r)n] / r + FV / (1 + r)n

price of bond = 70 * [1 - 1 / (1 + 0.065)30] / 0.065 + 1000 / (1 + 0.065)30

price of bond = 70 * 13.058676 + 151.186066

price of bond = $1,065.29

Keys to use in a financial calculator: FV 1000, N 30, I/Y 6.5, PMT 70, CPT PV

b)

Coupon = 0.07 * 1000 = $70

price of bond = Annuity * [1 - 1 / (1 + r)n] / r + FV / (1 + r)n

price of bond = 70 * [1 - 1 / (1 + 0.069)30] / 0.069 + 1000 / (1 + 0.069)30

price of bond = 70 * 12.534722 + 135.104198

price of bond = $1,012.53

Keys to use in a financial calculator: FV 1000, N 30, I/Y 6.9, PMT 70, CPT PV

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