Question

Andrew Industries is contemplating issuing a 30​-year bond with a coupon rate of 7.01% ​(annual coupon​...

Andrew Industries is contemplating issuing a

30​-year

bond with a coupon rate of

7.01%

​(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

6.56%​,

and yields on​ BBB-rated bonds are

6.84%.

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?

a. What is the price of the bond if Andrew Industries maintains the A rating for the bond​ issue?

If Andrew maintains the A rating for the bond​ issue, the price of the bond is?

​(Round to the nearest​ cent.)

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Answer :

Price of Bond when credit rating was A :

Price of Bond = Interest * PVAF(6.56%,30 years) + Face Value * PVF (6.56%,30th year)

where, Interest = 1000 * 7.01% ==> 70.1

Price of Bond = 70.1 * 12.9778507803 + 1000 * 0.14865298864

Price of Bond = 909.747339699 + 148.65298864 ==> 1058.40

Price of Bond when credit rating changed to BBB :

Price of Bond = Interest * PVAF(6.84%,30 years) + Face Value * PVF (6.84%,30th year)

where, Interest = 1000 * 7.01% ==> 70.1

Price of Bond = 70.1 *12.6111255088  + 1000 * 0.13739901499

Price of Bond = 884.039898166 + 137.39901499 ==> 1021.44

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
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...
Use the following information to answer the question(s) below. security term(yrs) yield(%) Treasury 20 5.5% AAA...
Use the following information to answer the question(s) below. security term(yrs) yield(%) Treasury 20 5.5% AAA Corporate 20 7% BBB Corporate 20 8% B Corporate 20 9.6% A) Wyatt Oil is contemplating issuing a 20-year bond with semiannual coupons, a coupon rate of 7%, and a face value of $1000. Wyatt Oil believes it can get a BBB rating from Standard and Poor's for this bond issue. If Wyatt Oil is successful in getting a BBB rating, what is the...
If a 10 year bond has a $10 coupon and the market price = $975 then...
If a 10 year bond has a $10 coupon and the market price = $975 then the yield to maturity is greater than 1%. True False According to the rating agency, Standard and Poor's, a AAA rated corporate bond never defaults while a A rated bond may. True False
The following table summarizes the yields to maturity on several​ one-year, zero-coupon​ securities: Security Yield ​(%)...
The following table summarizes the yields to maturity on several​ one-year, zero-coupon​ securities: Security Yield ​(%) Treasury 3.06 AAA corporate 3.18 BBB corporate 4.21 B corporate 4.82 a. What is the price​ (expressed as a percentage of the face​ value) of a​ one-year, zero-coupon corporate bond with a AAA​ rating? b. What is the credit spread on​ AAA-rated corporate​ bonds? c. What is the credit spread on​ B-rated corporate​ bonds? d. How does the credit spread change with the bond​...
The following table summarizes the yields to maturity on several​ one-year, zero-coupon​ securities: Treasury 3.08% AAA...
The following table summarizes the yields to maturity on several​ one-year, zero-coupon​ securities: Treasury 3.08% AAA corporate 3.22% BBB corporate 4.19% B corporate 4.89% a. What is the price​ (expressed as a percentage of the face​ value) of a​ one-year, zero-coupon corporate bond with a AAA​ rating? b. What is the credit spread on​ AAA-rated corporate​ bonds? c. What is the credit spread on​ B-rated corporate​ bonds? d. How does the credit spread change with the bond​ rating? Why?
5) Credit Rating Yield AAA 3% AA 3.2% A 3.5% BBB 3.8% BB 4.5% B 5.25%...
5) Credit Rating Yield AAA 3% AA 3.2% A 3.5% BBB 3.8% BB 4.5% B 5.25% a) Given the yields for bonds with different credit ratings, what would be the fair price of a 5-year maturity bond, which currently has identical risk to a bond rated ‘A’, if it has a coupon rate of 12% paid annually, and a par value of $1,000? b) What would be the price of the bond 3 years from today if the bond is...
Q19) The following table summarizes the yields to maturity on several​ one-year, zero-coupon​ securities: Security Yield...
Q19) The following table summarizes the yields to maturity on several​ one-year, zero-coupon​ securities: Security Yield ​(%) Treasury 3.13 AAA corporate 3.22 BBB corporate 4.28 B corporate 4.96 a. What is the price​ (expressed as a percentage of the face​ value) of a​ one-year, zero-coupon corporate bond with a AAA​ rating? b. What is the credit spread on​ AAA-rated corporate​ bonds? c. What is the credit spread on​ B-rated corporate​ bonds? d. How does the credit spread change with the...
c)   CleanUp Industries Inc. is issuing a zero-coupon bond that will have a maturity of thirty...
c)   CleanUp Industries Inc. is issuing a zero-coupon bond that will have a maturity of thirty years. The bond's par value is $1,000, and the current yield on similar bonds is 5.5%. What is the expected price of this bond, using the semiannual convention? d)   Free-Up Inc. has issued 30-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 8% and the current yield to maturity is 5%, what is the firm's current price...
The following table summarizes yields to maturity on several​ 1-year, zero-coupon​ securities: Security Yield Treasury 3.130​%...
The following table summarizes yields to maturity on several​ 1-year, zero-coupon​ securities: Security Yield Treasury 3.130​% AAA Corporate 4.039​% BBB Corporate         4.701​% B Corporate 5.662​% a. What is the price​ (expressed as a percentage of the face​ value) of a​ 1-year, zero-coupon corporate bond with a​ AAA-rating and a face value of $1,000​? The​ price, expressed as a percentage of the face​ value, is …………. (Round to three decimal​ places.) b. What is the credit spread on​ AAA-rated corporate​ bonds?  ...
The following table summarizes yields to maturity on several​ 1-year, zero-coupon​ securities: Security Yield Treasury 2.900%...
The following table summarizes yields to maturity on several​ 1-year, zero-coupon​ securities: Security Yield Treasury 2.900% AAA Corporate1 2.991% BBB Corporate        3.614% B Corporate 4.379% a. What is the price​ (expressed as a percentage of the face​ value) of a​ 1-year, zero-coupon corporate bond with a​ AAA-rating and a face value of $1,000​? b. What is the credit spread on​ AAA-rated corporate​ bonds?   c. What is the credit spread on​ B-rated corporate​ bonds? d. How does the credit spread change...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT