Problem
This question involves the hypothetical iPong firm from question 3.
a. How will demand be affected if a ratings agency upgrades your bond rating to AA?
b. How will the ratings upgrade affect the price of your bond?
c. How will the ratings upgrade affect your cost of borrowing?
Question 3
Let's say you own a firm that produces and sells Ping-Pong tables. The name of your company is iPong because your tables have a plug-in jack for all Apple products. To finance a new factory, you decide to sell bonds. Your bonds are rated BBB.
a. Draw supply and demand curves for your iPong bonds. (The quantity of bonds is measured along the x axis, and the price along the y axis.) Label the supply curve S, the demand curve D, and the equilibrium price p.
b. How will the demand for iPong bonds be affected if a new secondary market agrees to buy and sell iPong bonds? Illustrate the new demand curve in the graph above, and label it DSM. How will this affect the price and interest rate on iPong bonds?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.