Problem: Andrew Industries is contemplating issuing a? 30-year bond with a coupon rate of
7.47 %7.47%
?(annual coupon? payments) and a face value of
$ 1 comma 000$1,000.
Andrew believes it can get a rating of A from Standard and? Poor's. However, due to recent financial difficulties at the? company, Standard and? Poor's is warning that it may downgrade Andrew Industries bonds to BBB. Yields on? A-rated, long-term bonds are currently
6.97 %6.97%?,
and yields on? BBB-rated bonds are
7.37 %7.37%.
a. What is the price of the bond if Andrew maintains the A rating for the bond ?issue?
b. What will the price of the bond be if it is ?downgraded?